After over a year of rate hikes — and more recently, two successive hikes over the summer — the Bank of Canada has announced that it will be pausing the overnight policy rate. After the last increase of 25-basis-points in July, the current policy interest rate stands at 5.00%

“The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures,” the Bank notes in their press statement.

The Bank’s decision is in response to slower economic growth – Q2 GDP contracted at 0.2%, well behind the predicted 1.5% growth. While headline inflation saw an increase in July (at 3.3%), core inflation (at 3.42%) continues to be within the long-term target of 3.55%.

The BoC notes that with the recent increase in gasoline prices, inflation is expected to be higher in the near term before easing again. In their statement, they noted that while there has been a softening in underlying inflation, as long as high inflation continues, there remains a risk that high inflation becomes “the entrenched, making it more difficult to restore price stability.”

‘Momentum remains soft’

“Momentum remains soft, which should give the Bank of Canada sufficient confidence that inflation will trend to the target over time,” says Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO.

He states that there was decent economic momentum to start the year, keeping some upward pressure on inflation. Additionally, the labour market remains relatively tight.

The rate of unemployment increased by 0.1 percentage points, making it the third consecutive monthly increase.

“While the unemployment rate has risen, it remains historically low and still reflects some firmness in the labour market,” he says. According to Reitzes, wage growth should decline as the labour market loosens. It also takes time for inflation to slow following the rate hikes.

“Importantly, inflation remains well off the highs seen last year and is trending lower, even if slowly,” he adds.

Reitzes notes that inflation in August will likely accelerate again with gasoline prices. “Assuming energy prices don’t continue to climb, the rise in broader inflation is expected to reverse into and through 2024.”

He has not discounted further rate hikes on the horizon, cautioning that policymakers will continue to raise rates if inflation doesn’t slow down, or if growth signs begin to rebound.

In their announcement, the BoC also noted that they are prepared to increase the policy rate if needed and will continue to evaluate whether the evolution of excess demand, inflation expectations, wage growth, and corporate pricing behaviour are consistent with achieving the 2% inflation target.

How does a rate pause impact the housing market?

Historically, home sales pick up in the fall season. Victor Tran, a mortgage and real estate expert with RATESDOTCA notes that Canadians are likely to see a seasonal uptick in inventory and in home sales in the coming months, despite the current high interest environment.

“Those looking to sell should be able to find buyers quickly as inventory remains low,” he says. “Those looking to buy will likely be competing for quality properties.”

Tran notes that following a surge in bond yields, fixed-rate mortgages had been climbing, ahead of the BoC announcement.

“What happens with fixed and variable rates in the coming months depends on many factors,” he says. These factors include the overall pace of the economy and whether the Bank continues to raise rates before the year’s end. “That said, with fixed rates from major lenders rising from 15-20 basis points, mortgage rates across the board are likely to remain high for the foreseeable future,” Tran adds.

Tran advises those looking to secure a new mortgage to lock in a pre-approval rate now, and mortgage holders who are up for renewal within the next year can compare mortgage rates to make sure they are getting the most affordable rate.

The next BoC announcement is scheduled for October 25, 2023.

Read more:

July: Bank of Canada delivers 25-bps hike, raising rate to 5%

June: Bank of Canada raises overnight rate by 25-bps hike, policy rate now at 4.75%

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