Rates unlikely to see significant movement in the months ahead as central bank stays in wait-and-see mode
The Bank of Canada’s decision to hold its benchmark interest rate steady on Wednesday came as no surprise to the mortgage industry – and it’s unlikely to move the needle for the national housing market outlook, according to a top economist.
Sal Guatieri (pictured top), senior economist and director at Bank of Montreal (BMO) Capital Markets, told Canadian Mortgage Professional the outcome was squarely in line with expectations, with the central bank striking a cautious tone amid clear economic risks.
And homeowners and buyers shouldn’t count on much rate relief coming from the Bank in the months ahead, he said.
“The Bank is pretty comfortable holding policy steady,” Guatieri said. “That seems to balance the risks between a weak economy and potential inflation pressures stemming from higher energy costs. So there’s really no indication the Bank is ready to move on interest rates in either direction.”
The good and bad news from the latest BoC announcement
The sluggish Ontario and British Columbia housing markets have weighed on the national outlook in the first half of the year, and the latest BoC hold likely means more of the same, according to Guatieri.
Still, there’s a glimmer of good news: Bank decisionmakers clearly aren’t in any mood to cut rates, but a hike also doesn’t seem to be in the cards.
“Unfortunately, the soft housing markets in Ontario and BC likely will not receive much support from lower borrowing costs anytime soon,” Guatieri said. “But at least there’s some relief for potential buyers and even sellers who want to list their property and get a decent price. There’s no clear signs that borrowing costs will go up anytime soon either.”
The Toronto-area market has recorded three consecutive months of rising home sales, sparking some hope of a market recovery although volumes remain at depressed levels and prices continue to drift lower.
A more sustained recovery isn’t expected until affordability improves further – but Guatieri believes that could begin to take shape towards the end of the year.
“We’re getting closer to more reasonable affordability in the Ontario housing market,” he said. “We’re not quite there yet. So we will probably see continued softness in prices for a little while this year before we start to see a sustained pickup in sales and stabilization in prices.”
Outside Ontario and BC, Guatieri noted, the national housing market appears relatively healthy with sales running close to normals and prices rising modestly across most of the country.
What’s next for the Bank of Canada?
While most industry members viewed a June rate hold as a foregone conclusion, many were closely watching the language of its statement to see if it would give any indication of its next steps.
But the central bank’s statement was largely down the middle, with nothing to suggest it will veer from its current preference to hold rates where they are.
Only a significant deterioration in the national economy, Guatieri said, would raise the prospect of rate cuts – while an inflationary spike would likely increase the odds of a rate hike.
But with the Iran conflict and CUSMA (Canada-US-Mexico Agreement) renegotiations unresolved, BMO still sees a prolonged rate hold as the likeliest BoC strategy for the rest of the year.
“It’s just going to sit on the sidelines for quite some time – to see how the Iran conflict plays out, to see how CUSMA renegotiations play out,” Guatieri said.
Canadian financial markets, unsurprisingly, showed little reaction to Wednesday’s announcement. The Canadian dollar remained largely unmoved, while five-year Government of Canada bond yields – which strongly influence fixed mortgage rates – saw little change.
For now, brokers and borrowers should count on rates holding steady barring dramatic developments in Iran or for the economy, Guatieri said.
“There’s just too much uncertainty now, both about the Iran conflict and trade policies,” he said. “So there’s no reason to make a rash move in either direction on policy rates.”
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