Last week the Bank of Canada announced that they would leave the overnight target rate unchanged but has given indications that they will begin raising rates back to a normal pre-pandemic level going forward. This is good news for Variable Rate Mortgage holders, those with lines of credits or loans tied to your banks prime rate. Your interest rate and your payment will not change.
The Bank of Canada announces interest rates 8 times per year and this is the first of 2022 when more than 70% of analysts predicted they would raise rates today. Below is the Bottom Line from Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres. Her prediction is that we will see rates back to normal levels by the end of 2022 to where they were in early 2020. If that is the plan, that would change our Prime rate today from 2.45 to 3.70%. Those with a variable rate mortgage at Prime -1.00% would give you an interest rate of 2.70% and that would mean a payment increase of roughly $60 for every $100,000 in mortgage.
Bottom Line from Dr. Sherry Cooper
It surprises me that economists in Canada would expect the Bank to hike interest rates during a Covid lockdown without properly measured signaling beforehand. Bay St’s hysteria about inflation seems to have muddied thinking. The Bank will be taking out the big guns to get inflation under control. Overnight rate hikes begin at the next policy meeting on March 2 and then Quantitative Tightening shortly after that. The downsizing of the Bank’s balance could have even more dramatic effects on the shape of the yield curve, hiking longer-term interest rates.
In today’s policy statement and Monetary Policy Report, the Bank emphasized the strength of the housing market and the impact on inflation of the more than 20% rise in Canadian house prices last year. The MPR suggests that housing market activity strengthened again in recent months, led by a rebound in existing home sales. Low borrowing rates and high disposable incomes continue to contribute to elevated levels of housing activity in the first quarter. At the same time, other factors that support demand, such as population growth, are also now picking up.”
Traders continue to bet that the Bank of Canada will hike interest rates by 25 basis points five or six times this year. This would take the overnight rate from 0.25% to 1.5% to 1.75%. It was 1.75% in February of 2020 before the pandemic easing began. Markets also expect two more rate hikes in 2023, taking the overnight rate to 2.25%.
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The next rate announcement is March 2, 2022. If you want to discuss how future rate announcements could affect you, please call us at 604-552-6190.
