We're thrilled on behalf of our clients that variable mortgage rates won't increase today, thanks to the Bank of Canada's (BoC's) official 'no-hike' announcement.
Its overnight benchmark rate stands pat (that sounds nice-ish) at 4.50%, with most bank prime rates at 6.70%, apart from the variable rate discounts that lenders like us may offer.
The BoC is holding here because it has seen encouraging signs of cooling inflation. And it wants to allow time for its rate-hike agenda to work its way through the economy — it can take about 12-18 months for the impact to be fully apparent.
The central bank is cautious about pushing too many indebted Canadians over the edge and wants strong evidence that this rate ceiling isn't working before pushing out another increase.
Hooray! But we're keeping the celebration small.
Sure, a few balloons, party streamers and maybe a cupcake or two. But, then it's back to reality, looking to the next rate date (April 12, 2023) and beyond (read our CEO's 2023 Mortgage Rate Forecast).
There's a lot going on right now, economically speaking:
January's main inflation reading clocked in at a lower-than-expected 5.9%, but still well above the central bank's 2.0% target rate
Canada's Q4 2022 GDP was much lower than expected
Our record-low unemployment numbers and spending trends are still a concern moving on from today's decision
Canadian bond yields, a key predictor of where fixed mortgage rates are going, have recently increased, partly due to higher inflation in the U.S
The U.S. Federal Reserve has indicated it will continue raising rates there
Global supply chains are still experiencing disruption
Right now, mortgage interest costs comprise almost 3% of the CPI basket — and even if rates stay paused, it will take several months before it stops pushing up inflation. (Source: Robert McLister, MortgageLogic.news)
What does it all mean? Market volatility almost always follows a period of fast rate tightening (this one was the fastest pace since the 1990s). And just because the U.S. is running hotter than they want, doesn't necessarily mean Canada will hike rates in lockstep with its southern neighbours.
Even though the Canadian inflation picture is looking rosier compared to most of the world stage, and being the first major central bank to pause interest rate hikes — it's early days to say what's actually coming.
(And so we'll save the bigger celebration for when rates finally drop!)
What is CPI? The Consumer Price Index is a measure of core inflation that tracks common price changes across categories in the CPI basket (such as groceries and gas). The Bank of Canada uses this indicator to target inflation and decide whether to increase or lower rates.
Why does Canada's low unemployment risk further rate hikes?
With a strong labour market, it raises the prospect of a wage-price spiral. When higher wages are demanded to pay for higher inflation (and employers comply to keep workers), it increases the risk that higher prices will become baked into the inflation cake, making it harder for prices to come down through the natural economic course.
So far, the central bank is encouraged that salary increases haven't spiked, remaining below the current level of inflation.
But when January's job numbers came out 10x hotter than expected, it set off alarm bells that sent bond yields higher (a forward-looking indicator of where rates may be headed). So far, it doesn't necessarily mean future BoC rate increases are on the table, but the sector-surge — along with higher inflation in the U.S. — has helped push the prospect of any rate drops until at least Q1 2024.
The pause today comes amid indications that the exuberance will drain out of the labour market without help from more rate hikes, but time will tell.
"The Bank of Canada remains worried about service-sector inflation ... Nonetheless, its latest inflation forecast sees annual CPI inflation dropping to around 3 per cent by the middle of the year and back to the 2-per-cent target by the end of 2024." – Mark Rendell, Globe and Mail, March 5, 2023
Will fixed rates rise more?
As we mentioned above, Canadian bond yields recently went up, sending fixed mortgage rates up as well (by around 0.25%, depending on the lender). It was a surprise to some economists, as bond yields (and fixed mortgage rates) have been holding steady, waiting for an inevitable Bank of Canada rate drop on the horizon (with the idea that variable rates have likely peaked for this cycle).
But, back to the economic-volatility thing. Fixed rates may go up or down again in the short term, even if variable rates don't move. Everything depends on the inflation, unemployment and economic-growth numbers posted by both countries at various times every month. And Canadian bonds often react to U.S. data because both countries' economies are intertwined.
Read our 2023 Rate Forecast for updates as we go. And, learn more about watching watch bond yields for clues as to where rates may be headed.
Should you choose a fixed or variable rate right now?
It all depends on you — and your (mortgage) appetite for risk in changing interest rates and budgets. If you're willing and able to hang on, you may save more later if rates really have peaked and they go down within the next year or two.
Many home buyers and owners right now are looking at shorter-term mortgage options (less than the standard 5-year term), hoping to renew into a lower rate sooner but without the potential risk that comes with variable rates.
Each rate-type has its pros and cons. Give us a shout, and your expert True North broker can outline your specific details for targeted advice and a clearer decision.
If you're worried about the rate you'll get at renewal time, we can help with that, too — it's never too early to discuss your options and let us find your best savings strategy.
Want to dent your mortgage rate? That's what we do.
We have your best mortgage rates. In fact, our rates are 0.20% lower on average compared to our competitors (like the big banks or other MFC lenders).
We pass along a volume discount to lower your rate, and have access to several accredited lenders for the best product fit, too. It all adds up to more mortgage savings — important to consider in a time with higher rates than we've seen in a while.
Anywhere you are in Canada, we're here to help. Our expert brokers are online, on the phone, available through Morgan (our awesome chatbot) or in our 12 stores across Canada. Or, our Mobile Brokers can come to you.
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