What the Bank of Canada statement means for interest rates

The central bank's October announcement was one of its most significant this year

What the Bank of Canada statement means for interest rates

The Bank of Canada struck a positive tone on Canada’s economic recovery from the COVID-19 pandemic in its most recent interest rate announcement, with Governor Tiff Macklem forecasting an “increasingly healthy economy” despite the lingering threat of inflation.

Speaking with reporters at the release of the Bank’s October Monetary Policy Report, Macklem said that while he expected inflation to continue rising – to around 5% at the end of the year, up from its current level of about 4.5% – he anticipated that would return to the 2% mark by the end of 2022.

“I’m struck by how much progress our economy has made since the start of the crisis,” he said. “We’ve come a long way and our forecast is for an increasingly healthy economy, even if these complications are going to be with us for a while longer.”

For mortgage professionals, the headline news from the announcement was undoubtedly the Bank’s revision of its forecast for changes to its policy interest rate. The timescale for planned rate hikes has accelerated, with the Bank now projecting they’ll take place in the middle quarters of next year rather than its previous prediction of the second half of 2022.

Did that news come as a surprise to the mortgage community? Not at all, according to RateHub.ca co-founder and CanWise Financial president James Laird (pictured top). He told Canadian Mortgage Professional that given the Bank’s recent ebullience on the economy, an amendment of its planned timeline for hikes had been in the cards.

Read more: Will inflation force the Bank of Canada’s hand on interest rates?

“I wasn’t [surprised], given the positive news and that COVID numbers have stayed low in Canada, generally speaking,” he said. “I was expecting them to move that date forward; I thought it was possible they could have moved it even further forward than they did.”

That said, the Bank’s new timescale for the benchmark rate to begin rising is by no means set in stone, with the uncharted waters of the pandemic meaning it’s difficult to predict what’s in store for the Canadian economy in 2022.

Laird noted that a rapid surge in case numbers or the return of pandemic restrictions could lead the central bank to think again on its planned schedule for rate increases.

“This all depends on things continuing in a positive manner like they have been in Canada since June,” he said. “If we go backwards in the winter, they will change things for sure.

“If we have to go back to lockdowns, business closures and things like that, they will definitely push this out. I think this is dependent on us being towards the end of this pandemic.”

With variable mortgage rates tied to Canada’s benchmark policy rate, the news was also viewed as a signal that those record-low variable options are soon set to climb – although Laird said that with bond yields rising, fixed rates could also see further upward movement in the very near future.

Those yields crept up as the Bank announced the winding-down of its quantitative easing program, a staple of its approach to the pandemic since March 2020.

Read more: Variable rate mortgages – what's in store?

In its statement, the Bank said that it would be moving into the “reinvestment phase” which would see it only purchase government bonds to replace maturing bonds, having gradually tapered down its bond-buying program in recent months.

That decision arrived despite the Bank’s emphasis that “considerable monetary support” was still required to steer the economy through the current pandemic-related turbulence.

One of the biggest question marks hanging over the Bank’s plans to hike the benchmark rate is whether those will be significant increases – not to mention the possibility of one rate hike being swiftly followed by another.

The answer to that question will be an important factor in determining whether a fixed or variable rate is the best option for most clients in the current mortgage climate.

“When [the variable rate] rises, how many times and by how much?” said Laird. “And what’s the timing of those increases? If they’re more spread out over a five-year period, then you can still come out ahead over the variable rate.

“But if there are many next year, and if they do any 0.5% moves instead of quarter-point moves, then the fixed rate will be the best strategy right now.”