In Brief
- Today's BoC Announcement: No change to rates
- Overnight rate: 0.25%
- Prime Rate: 2.45% (no change; see Prime Rate)
- Market Rate Forecast: Three 0.25% hikes within 24 months
- BoC's Headline Quote: "We remain committed to holding the policy interest rate at the effective lower bound [0.25%] until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In the Bank’s April projection, this happens sometime in the second half of 2022."
- BoC on the Economy: "...The Canadian economy is expected to rebound strongly..."
- BoC's Full Statement: Click here
- Next Rate Meeting: July 14, 2021
The DOT's Take
Price increases (on just about everything) remain the talk of the rate market. CPI inflation blew above the Bank of Canada's 3% maximum tolerance in April and isn't letting up.
Meanwhile, crude oil, a major inflation driver, broke $70 today for the first time since October 2018. It's just one of many commodities that have surged in 2021 ahead of the anticipated demand spike in the second half of this year.
Most importantly, there's increasing evidence that people now believe prices are going up and will keep going up. That can be self-fulfilling.
Add all of this to economic supply constraints and you've got a potential recipe for the highest core inflation since 1991.
With vaccinations full steam ahead and re-openings across Canada, the economy should be back in gear by the end of next quarter — barring some crazy fourth wave of COVID. "...We continue to expect GDP to return to its pre-pandemic level by August or September," says Capital Economics. If that's true, expect it to be preceded by a breakout in bond yields, leading fixed mortgage rates higher.
Rates are based on a home value of $400,000
How to play it
Here comes the broken record again. You've heard us sing the same tune since November — that the reward/risk ratio looks unfavourable for variable rates at this point in the rate cycle. Today's BoC meeting hasn't changed that.
A few weeks back, BoC boss Tiff Macklem said, “There is a risk that this run-up in inflation proves to be more persistent than we’ve expected.” There's almost a 1 in 3 chance that's the case, suggests former BoC head David Dodge. And even if above-3% inflation is short-term, as the BoC predicts, rates are ultimately going up regardless (again, barring unknown crises).
Against that backdrop are 5-year fixed rates that are still just 0.55% from the all-time low. As we speak, you can snatch one as cheap as 1.54% to 1.94% (default-insured) and 1.99% to 2.14% (uninsured). Those ranges, by the way, depend mainly on the province, lender and mortgage features. You can compare them all here: Latest 5-year fixed rates.
Five-year fixed rates are now 0.59 to 0.93 percentage points above comparable variable rates, but that floating-rate advantage could be easily negated by your run-of-the-mill rate-hike cycle. Markets have been anticipating up to 2.00 percentage points of BoC rate tightening within five years (1.50 percentage points on the low end).
Even if Canada's strong dollar, highly leveraged consumer and retracing commodity prices subdue rate hikes somewhat, protecting against uncertainty is worth something. The best insurance most borrowers can buy is now a 5-year fixed rate from a fair-penalty lender. It's a term that remains exceptional value compared to literally all others.
Variable and short-term mortgages are best suited to ultra well-qualified, risk-tolerant borrowers, particularly those who may not need a mortgage for five full years. That will likely remain true until the spread between fixed and variable rates grows materially wider.
