In this morning’s announcement, the Bank of Canada adhered to market expectations by maintaining their overnight rate at its current level. While the decision was not a shocker, there was some speculation about the possibility of another rate hike. The Bank has made it clear that they are not taking chances with inflation. If they had any doubt, they would have erred on the side of caution by pulling the trigger on yet another rate increase. Fortunately, that didn’t happen.

Does this mean we have seen the last of the rate hikes?

Although today’s announcement was positive, the Bank of Canada expressed ongoing concerns about inflation and reiterated that they are “prepared to increase the policy interest rate further if needed”.

Given the ongoing uncertainty surrounding inflation and the overall economic landscape, the Bank of Canada needed to choose their words wisely. On January 25th, 2023, they announced that they were pausing their rate hikes. They maintained this stance through their March and April announcements, only to resume the rate increases in June and once more in July. They want to refrain from explicitly signalling a pause in case they find themselves in a position where they need to move forward with another increase.

However, the Bank of Canada prefers to consolidate rate changes in a more clustered fashion. They don’t like to pause, then increase, pause, then increase again. While they haven’t made an official announcement regarding a pause, it appears to be their anticipated course of action. Time will tell.

In their announcement, they emphasized their ongoing concerns about inflation. They also noted that “CPI inflation is expected to be higher in the near term before easing again”. This is nothing new, as inflation was already expected to be a bit rocky for the remainder of 2023. As long as inflation remains within the Bank’s anticipated range, any upticks to inflation in coming months shouldn’t trigger another hike.

 

What Does This Mean for Fixed Mortgage Rates?

On August 21st, bond yields reached their highest level since November 2007, marking a significant surge that had been steadily climbing since April of this year. The result was notable upward pressure on fixed mortgage rates, causing them to spike by more than 1% over that period. However, the yields have since been trending downwards, thereby alleviating the pressure on fixed rates. As a result, some lenders have already moved forward with cuts to their 4 and 5 year fixed rates.

But wait….

Despite the expectation for the Bank of Canada to maintain their rate, bond yields surged by roughly 4% yesterday and another 1.53% at the time of writing this blog. Today’s decision should have ideally driven the yields down further. However, with strength in the US economy, they have been rising for two days straight now. This is not enough time to make a call one way or another. But if the bond yields continue to rise, then it’s possible that we could see further increases to fixed rates on the horizon.

On Friday, it appeared that we would see the bond yields continue to decline with the anticipation of today’s announcement. This would have resulted in more lenders dropping their fixed rates. However, if the bond yields continue to rise as they have for the past two days, then we can expect to see the opposite. It’s still too soon to tell and it all comes down to how the yields move over the next few days.

I’ll be talking about this in detail on Instagram Live tomorrow at 12 noon, so be sure to tune in for further insight on potential rate movement.

 

Conclusion

The Bank of Canada’s decision to maintain their rate is undoubtably positive news. Although inflation may prove to be somewhat persistent for the remainder of the year, it’s expected to decline further in 2024. Many economists are expecting the Bank of Canada to start cutting their rate by the middle of 2024 providing that inflation is cooperating. The big six banks are still forecasting for cuts between 0.75% and 1.50% by the end of 2024, with further cuts into 2025.

Forecasts can and do change, and what is expected to happen today could be completely different than what we see tomorrow. We’ve seen this time and time again over the last few years. Eventually, we’ll catch a break in our favour. Time will tell and anything can happen.

The next scheduled announcement from the Bank of Canada will be on October 25th.