In recent weeks, talk of a potential “micro” interest rate cut has grown louder. That’s largely due to rising COVID case counts and more restrictive lockdown measures.
But in the Bank of Canada’s interest rate decision Wednesday, in which it left rates unchanged, its more sanguine outlook threw cold water on rate cut hopes.
“In the end, we avoided the rate cut that the market had been increasingly pricing in,” economists from National Bank of Canada wrote in a research note. “If there was a time to lower the policy rate, this would have been the meeting to do it given the surge in COVID cases, strong Canadian dollar, ugly December employment report and negative growth outlook to start the year.”
BoC Deputy Governor Paul Beaudry said in December that the Bank still has a “range of options at our disposal.” That included the “possibility of a lower—but still positive—policy rate.”
With the Bank’s key lending rate at 0.25%, where it’s been since April, Beaudry’s implication was for a possible rate cut smaller than the traditional 25-bps rate movements—such as 10 or 15 bps. That’s where the “micro” rate cut reference came from.
But in a statement following Wednesday’s rate meeting, the Bank made no mention of a potential cut. That was purposeful.
Instead, it reiterated that it would keep its overnight rate at its “effective lower bound,” where it now lies, until the recovery is “well underway.”
“In our projection, this does not happen until into 2023,” the statement read. It’s been repeating that for months now.
Fast recovery could see rate hikes by the end of 2022
Despite the Bank saying Canada’s economy continues to require “extraordinary monetary policy support” in the near term, it released a more positive outlook for the second half of the year.
It sees negative growth for the first quarter, but predicts the economy will grow by 4% over the course of 2021, and almost 5% in 2022. That’s almost double the average annual growth of the last 20 years.
That, plus the prospect of vaccination rollouts, has markets pricing in the first rate hike by as early as mid-2022. The BoC, however, continues to suggest it’ll keep rates low until “into 2023.”
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What it means for mortgage shoppers
For those in the market for a mortgage and unsure whether to go fixed or variable, know this. Economic optimism usually implies rate risk.
If 2021 is truly the year we emerge from the trough of the business cycle, rates could easily start to climb in less than two years. With that prospect, today’s record-low 5-year fixed rates are the value leaders.
Fixed-5 mortgages are currently priced just 0.30%-points more than variable rates, scarcely more than one BoC rate hike. That’s a solid risk/reward if you choose a fair-penalty lender with good refinance options. In fact, the 5-year fixed is the best protection you can get against rate hikes through 2025.
In terms of rates, the lowest nationally available default-insured 5-year fixed rates remain at 1.39%, or even lower in select provinces from discount brokers. For uninsured borrowers (those with a down payment of 20% or more, an amortization over 25 years or a home purchase over $1 million), you’re looking at just 1.64% or so.
By contrast, variable rates are about 30 basis points lower. But the gamble is that this edge could disappear altogether after year two of your term. That’s a bet most aren’t willing to take.
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