Is the Bank of Canada ready to hit pause on rate hikes?

The central bank has some big decisions to make

Is the Bank of Canada ready to hit pause on rate hikes?

All eyes in the mortgage industry will be on the Bank of Canada next week for its second policy rate announcement of the year, with a pause on its rate-hiking trajectory potentially in the cards.

The central bank has increased its benchmark rate eight times during the past 12 months, seeing it leap from its rock-bottom pandemic level of 0.25% to 4.5% after the January announcement, but its language following the most recent decision indicated that it would hold fire on further rate jumps barring unexpected economic developments.

Since then, Canada has seen a blowout labour market report, with the economy adding a stunning 150,000 jobs in January, according to Statistics Canada. Still, inflation has continued to inch downwards from its record highs of last summer while the national economy remained largely flat to begin the year, trends that likely strengthen the case for a pause by the Bank.

That said, the prospect of further hikes by the United States’ Federal Reserve could throw a spanner in any plans to keep rates unchanged in Canada down the line – particularly with the Canadian central bank often moving in lockstep with the United States where interest rates are concerned.

Chase Belair (pictured top), co-founder and principal broker at digital mortgage broker nesto, told Canadian Mortgage Professional that the possibility of more rate increases in Canada couldn’t be discounted if the US central bank continued to move forcefully.

“I’m under the impression that our neighbours south of the border will increase their rate a little bit more – how much more, I’m not sure, but I think they will continue to increase the rates to ensure meeting their inflation target,” he said. “I think it’s the result of official numbers not being where they want them, with employment and wage data being too strong.

“Now, in Canada, I don’t think we have as much reason to continue increasing the rates. I think that we actually have more reason to pause and see where we land, but I’m fearful that we’re going to follow them a little bit because of what we’ve done historically.”

When will the full impact of BoC rate hikes to date become apparent?

While growing global interconnectedness means the impacts of major financial decisions and changes in rates are more quickly apparent now than they have been historically, Belair said the Bank should consider that the full effect of its rate increases is not yet fully clear.

That applies especially where borrowers who took out a mortgage in recent years and are now scheduled for renewal are concerned, he said.

“The fixed-rate mortgage holders who gained a mortgage in 2018 [are] coming up for renewal this year,” he explained. “2018-20 were really heavy homebuying years, so renewing at higher rates is really going to cause a lot more Canadians to put the pause on their spending.

“If you got a variable-rate mortgage in 2018 at a fixed payment, your mortgage payment now at renewal time is going to be higher than your payment was when you bought the house in the first place even though you’ve been paying your mortgage down for five years.”

Those scenarios could create a cashflow shock for many Canadians throughout this year as their mortgages come due for renewal, he added. “Once that happens, then I think the Bank of Canada will start seeing significant progress in the inflation data that they’re looking for.”

When will inflation return to the Bank of Canada’s target level?

Canada’s consumer price index currently sits at 5.9%, down from 8.1% last June (its highest level for nearly four decades) but still significantly higher than the central bank’s target level of 2%.

The Bank indicated in its most recent policy rate announcement that it expects inflation to reach 3% in the middle of this year and return to that 2% level at some point in 2024.

Its second rate decision of the year is set to be revealed on Wednesday, March 8 at 10:00 a.m. EST, with Governor Tiff Macklem to deliver remarks in the aftermath of that announcement.

What are you predicting for the Bank of Canada’s next policy rate announcement of 2023? Let us know in the comments section below.