September 5, 2018
The BoC Holds Rate in September Announcement, But More Hikes to Come
The Bank of Canada has opted to leave its trend-setting Overnight Lending Rate untouched this month, after hiking it by a quarter of a per cent in July. However, it remains optimistic regarding economic growth, pointing to more hikes to come this year despite continued uncertainty around NAFTA and trade relations with the United States.
BoC Not Swayed by Stronger-Than-Expected Inflation
Indeed, perhaps the Canadian economy has run hotter than expected in August, as the rate of inflation surged above 3 per cent for the first time since 2011, fueled by higher airfare and energy prices. While that amped up analysts’ predictions of a September hike, pinning the likelihood at a one-out-of-four chance, the BoC says it remains committed to a slow and steady approach.
“Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target,” states the BoC’s release. “We will continue to take a gradual approach, guided by incoming data. In particular, the Bank continues to gauge the economy’s reaction to higher interest rates.”
Housing Market Stabilizing After Mortgage Rule Changes
According to August data, the economy continues to strengthen in line with the Bank’s predictions; GDP improved by 1.4 per cent and 2.9 per cent in the first and second quarters respectively, and will cool slightly in Q3 as energy and export prices are expected to dip.
However, many positives, such as improving business investment, employment, and a stabilizing housing market underpin economic stability; the housing market, in particular, is starting to even out after a tumultuous year, as borrowers adjust to a higher interest rate environment and new mortgage qualification rules put in place in January.
There’s also good news for highly-indebted Canadian households, as the Bank reports the national debt-to-income ratio – the amount a household owes in relation to what it earns – has edged lower, reducing the overall risk posed by consumer debt to the economy.
Based on this, as well as investment activity, the odds of an October hike are two out of three.
What Does This Mean for Mortgage Borrowers?
Variable-rate mortgage borrowers and LoC holders can breathe a sigh of relief, as no movement from the BoC means their monthly payments will remain the same. However, with an October increase so strongly anticipated, and with more hikes expected to come in 2019, it’s important for borrowers to be prevalent as rates are set to rise in the near future.
While variable-rate borrowers are required to qualify at a higher interest rate when applying for their mortgage – known as the Bank of Canada’s five-year benchmark rate – meaning these borrowers already have some financial leeway padded into their home affordability, it’s a good idea to review how a moderately higher mortgage payment will impact household budgets.
While fixed-rate mortgage borrowers are not directly impacted by BoC movements, factors behind fixed-rate pricing will react to this month’s lack of rate movement, which could lead to slightly lower rates for new fixed mortgage applicants in the short term.
The long-term trend for borrowers – and whether ongoing NAFTA uncertainty will impact the economy – will become more clear on October 24th, when the BoC makes its next rate announcement.