BoC decision: What would a pause mean for borrowers facing renewal?

An end to hikes would be welcomed by homeowners – but rate cuts are not in the cards yet

BoC decision: What would a pause mean for borrowers facing renewal?

The Bank of Canada is set to reveal its latest decision on interest rates this morning – but unlike its announcements during the past year, the statement is widely expected to reveal no new change to its benchmark policy rate.

That would buck a trend that began in March 2022, when the central bank introduced a quarter-point hike to the trendsetting rate in the first of eight increases aimed at tackling inflation and cooling an economy that had heated rapidly during the COVID-19 pandemic.

Those rate jumps have seen the Bank’s policy rate spike by 425 basis points, from 0.25% to its current level of 4.5%, but analysts widely expect its governing council to follow through on the indication in its most recent rate announcement that a pause was in the cards.

In a recent Reuters poll of economists conducted between February 24 and March 3, all 32 respondents said the central bank would keep the overnight rate steady in March, with a majority also predicting no further hikes would take place this year.

That verdict arrived with inflation having dropped once again in January, falling to 5.9%, with the economy appearing to stall at the end of the year as the impact of rate hikes begins to take hold.

Challenges would remain despite a pause on hikes

An end to rate hikes would be welcome news for scores of Canadian homeowners who have seen their monthly payments skyrocket and buyers facing daunting affordability challenges following the Bank of Canada’s series of increases.

Still, the high-rate environment remains a significant hurdle for many borrowers, and with lower rates not expected to arrive until 2024 at the earliest, Canadians whose fixed-rate mortgage is coming up for renewal this year could face some difficult decisions.

Chris Allard (pictured top), a mortgage broker who runs a team in Ottawa, told Canadian Mortgage Professional that maintaining communication with those clients should be top of mind for brokers as they map out a strategy for the coming months.

“I think for us brokers, we’ve got to make sure that we speak to our customers who have renewals coming up and make sure that they’re OK from a budgeting standpoint with these new higher rates,” he said. “People renewing now had rates on their contract of about 3% if they had a fixed rate – now they’re going to be paying five-point-something.

“So if they’re renewing at today’s rate, but they’re comfortable, then they’re good. If they’re not, is there a way to restructure the amortization to make the cashflow more comfortable? I think those are some of the priorities specific to renewals and refi in the near future.”

Allard said he had not seen any difference between 2023 and other years in borrowers switching to a new lender versus renewing with their existing one, although he noted that timing had become especially important during renewal in the current climate.

“Some of the fixed rates went up in the last few weeks. So right now, typically the existing lender may have an edge on the renewal because they might have sent out the renewal letter with the rate from three weeks ago, which is no longer existent today,” he said.

“We’re having pretty quick discussions: ‘Have you got your letter a few weeks ago? If it’s more competitive than today’s rate, go ahead and sign it – or [if] you just got your letter, the rate’s not ultra-competitive, then it’s worth going through the process of requalifying.’”

What could cause further rate hikes in 2023?

Even if the Bank of Canada decides to hold fire on increasing its rate again this time around, a couple of factors could give it reason to believe that further hikes are required down the line this year. One of those is a still-robust labour market, with the Canadian economy having added 150,000 jobs in January in a sign of its resilience in the face of rate jumps to date.

With the Canadian economy also closely tied to events south of the border, another development the central bank will be keeping in mind is the apparent willingness of the US Federal Reserve to remain aggressive on its own key rate.

On Tuesday, Fed chairman Jerome Powell told the US Senate’s banking committee that he “would be prepared to increase the pace of rate hikes” based on the strength of recent economic data.

What are your thoughts on the Bank of Canada’s current policy on its benchmark interest rate? Let us know in the comments section below.