After eight successive rate hikes, Bank of Canada maintains policy rate at 4.5%

After eight successive increases, the Bank of Canada announced its first policy rate pause of 2023 on Wednesday morning. With the last increase of 25-basis-points in January, the current overnight rate still stands at 4.5%, the highest it’s been since 2007.

To slow down an overheated economy and curb inflation, the Bank initiated a series of rate hikes that began in March 2022.

In its press release, the Bank notes that as predicted, global growth has slowed. While the US dollar is strengthening, the war in Ukraine and China’s recovery remain potential risks.

Inflation slowed down to 5.92% last month – in comparison to a near 40-year high of 8.1% in June of last year.

With a tight labour market, reduced household spending, and decrease in the price of durable goods, the Bank notes that “quantitative tightening is complementing this restrictive stance.”

It also notes that while inflation is still too high, it is coming down due to lower energy prices.

Rate pause indicative of easing inflation

Sal Guatieri, senior economist at the Bank of Montreal notes that the rate pause signals both successful monetary tightening measures and lessening inflation. “A combination of moderating inflation and an awareness that the lagged effects of past rake hikes will slow the economy further,” he said in an email.

The regulatory authority expects inflation to come down to approximately 3% by mid-year and return to the target of 2%, with sustainable economic growth resuming in 2024.

The Bank states that it “will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target.”

What does a rate pause mean for homeowners and homebuyers?

“With Bank of Canada’s rate pause, many variable-rate holders and those up for renewal this year are likely facing a tough situation financially,” says Victor Tran, mortgage expert at RATESDOTCA. “There is so much speculation that rates may drop by the end of 2023 or early 2024. But that isn’t definite, and it doesn’t help homeowners that are strapped for cash now.”

For variable-rate mortgage holders who have been struggling with higher monthly payments, the rate pause offers a sign of relief.

Variable-interest rates are currently at 5.50%, and while a rate pause does not mean decreased monthly payments, it does offer respite from aggressive rate hikes.

While fixed-rate mortgage holders in the middle of their term are largely unaffected by the Bank’s overnight rate, those who are up for renewals can expect to see higher rates than when they first locked in. If interest rates start their eventual decline at any point this year, those with fixed rates may lose out on the savings that would come from rate decreases.

Home prices continue to fall across Canada – with the average selling price in the Greater Toronto Area (GTA) hitting $1,095,617 in February, an 18% decrease from the buying frenzy of February 2022. According to the Toronto Regional Real Estate Board, new listings continue to drop year-over-year and poll data reveals that “buying intentions have picked up for 2023.”

Interestingly, while the GTA will see a housing correction, smaller towns outside of the GTA will be hit hardest when housing prices decline. As small towns saw a bigger price increase during the pandemic, those prices will drop the most.

As per recent RATESDOTCA mortgage quoter data, total mortgage quotes for purchases, refinances, and renewals for both primary and investment properties are rising. Compared to December of last year, January saw a 107% increase in mortgage renewal quotes and 92% increase in purchase quotes.

The data also highlights that more consumers are choosing fixed-rate mortgages over variable. And thanks to the fall in home prices, some buyers are choosing to put down less than 20% on their home, an impossibility for homes over $1 million.

A favourable spring housing market

Ahead of the Bank’s announcement, Tran noted a substantial increase in mortgage pre-approvals. “People that were waiting on the sidelines over the past several months for the market to stabilize are now taking advantage of this window of opportunity.”

For those who are thinking about purchasing a home in the next few months, he advises them to get pre-approvals now. “It costs nothing, and can secure you a rate for four months, providing some breathing room should fixed rates continue to move upwards,” he says.

“The best thing a homeowner can do if they are worried about making their mortgage payments is to talk to a mortgage broker about what options are available for their individual situation,” Tran says.

“There may be options to lower monthly payments that they aren’t aware of.”

As buyers look to the spring housing market, analysts expect an eventual shift in tides once again, with competition for homes fueling higher prices.

Apart from speaking to a broker, you can also compare mortgage rates to make sure you are getting the most affordable rate.

READ MORE:

January: Bank of Canada enters 2023 with a 25-bps hike, policy rate now 4.50%

December: Bank of Canada ends the year with a 50-bps hike, increasing the overnight rate to 4.25%