The Bank of Canada (BoC) has been keeping its key interest rate at a record low of 0.25% since March 2020, when it slashed it by 1.5% in response to the COVID-19 pandemic. However, as the economy recovers and inflation rises, many experts are predicting that the BoC will start to hike its rate sooner than expected.
Why does the BoC change its interest rate?
The BoC’s main objective is to keep inflation within a target range of 1% to 3%, with a midpoint of 2%. Inflation is the general increase in the prices of goods and services over time, and it affects the purchasing power of consumers and businesses. When inflation is too high, the BoC may raise its interest rate to cool down the economy and reduce the demand for goods and services. When inflation is too low, the BoC may lower its interest rate to stimulate the economy and increase the demand for goods and services.
How does the interest rate affect mortgages?
The BoC’s interest rate influences the prime rate, which is the base rate that banks use to set their lending rates for variable-rate mortgages, lines of credit, and other loans. When the BoC raises its interest rate, banks usually follow suit and increase their prime rate, which means that borrowers with variable-rate mortgages will pay more interest on their loans. When the BoC lowers its interest rate, banks usually do the same and decrease their prime rate, which means that borrowers with variable-rate mortgages will pay less interest on their loans.
Fixed-rate mortgages, on the other hand, are not directly affected by the BoC’s interest rate changes, as they are based on the bond market. However, bond yields tend to move in tandem with the BoC’s interest rate expectations, so fixed-rate mortgages may also rise or fall depending on how the market anticipates the BoC’s future moves.
What are the signs of a rate hike?
The BoC has indicated that it will not raise its interest rate until the economic recovery is complete and inflation is sustainably at 2%. However, some recent data suggest that these conditions may be met sooner than anticipated. For instance:
– The Canadian economy grew by a stronger-than-expected 5.6% in the second quarter of 2021, rebounding from a contraction in the first quarter.
– The unemployment rate fell to 6.9% in August 2021, down from a peak of 13.7% in May 2020.
– The inflation rate surged to 4.1% in August 2021, the highest level since March 2003, driven by higher prices for gasoline, food, shelter, and durable goods.
These indicators show that the economy is recovering faster than expected and that inflationary pressures are building up. As a result, some analysts are forecasting that the BoC will start to raise its interest rate as early as April 2022, instead of late 2022 or early 2023 as previously projected.
What does this mean for mortgage borrowers?
If you have a variable-rate mortgage or are planning to get one soon, you should be prepared for a possible increase in your interest rate and monthly payments in the near future. You may want to consider locking in a fixed-rate mortgage or refinancing your existing mortgage to take advantage of the current low rates before they go up.
If you have a fixed-rate mortgage or are planning to get one soon, you may still benefit from securing a low rate now before they rise along with bond yields. However, you should also be aware of the potential penalties for breaking your mortgage contract early if you want to switch lenders or sell your property before your term ends.
Whether you have a variable-rate or a fixed-rate mortgage, you should always review your budget and financial goals regularly and consult with a mortgage professional to find the best option for your situation.