Despite record inflation, the Bank of Canada is keeping interest rates steady – for now

The Bank of Canada has decided not to raise its benchmark interest rate for the time being.

Like many other central banks around the world, the bank lowered its policy rate – known as the target for the overnight rate – at the start of the pandemic in March 2020, to ensure that consumers and businesses have access to cheap loans to keep the economy afloat.

But two years of lower borrowing rates have been a major contributor to inflation, which hit nearly 5% in Canada last month, its highest level in more than 30 years.

This has raised expectations that the bank will soon start raising its rate. But the bank has decided not to do so for the time being, opting to keep its rate at 0.25%, the same level it has been for the past 670 days.

But it made it clear that he might lean that way in the very near future.

Although the rate remained the same, the bank decided to remove what it calls its “exceptional forward guidance” to keep rates where they are for as long as necessary, until the economy slows. be absorbed.

“This is a significant change in monetary policy,” Governor Tiff Macklem said at a press conference after the announcement. “[It] signals that interest rates will now be on an upward trajectory.”

But the bank said continued uncertainty around the Omicron variant means it is not yet ready to take its first steps down that path.

WATCH | The Bank of Canada explains why it’s not ready to raise rates yet:

Bank of Canada governor discusses timeline for post-pandemic return to normal

Tiff Macklem is asked when the bank will be ready to remove stimulus from the economy. 1:52

At least one bank supervisor says standing up was a mistake.

“The decision, in our view, is a political faux pas,” said FX analyst Simon Harvey of Monex Canada, “and it’s a move that could prove costly down the road.”

By waiting to raise its rate, Harvey said, the bank risks “emboldening near-term inflation expectations and stoking the fire under the housing market.”

The Canadian housing market has been on fire during the pandemic, with cheap loans acting like rocket fuel on the scorching tinder of demand, driving up prices.

The central bank rate affects the rates Canadians get from their banks on things like variable rate mortgages, so keeping the rate low will prolong that.

Adrian Howell owns a condo in Toronto and took out a variable rate loan. He says he is looking to secure a fixed rate before interest rates rise. (Doug Husby/CBC)

That’s good news for Adrian Howell, who has an adjustable-rate loan on his Toronto condo and is watching the market carefully, waiting for a moment to lock in before rates rise.

“With interest rates remaining the same, I have a bit more time to make comparisons, but I will definitely lock in my rate or lock in a fixed mortgage at some point before March,” he said. he declares. told CBC News in an interview.

He is not the only one. Mortgage broker Sung Lee of says she sees a number of existing homeowners and potential buyers trying to lock in ahead of upcoming hikes.

“Whether it’s potential customers looking to make an offer for a home or for mortgages to renew, we get a lot of early renewal requests,” she said. “People are trying to take advantage of the really low interest rate environment before they see further increases.”

Small increases add up quickly

While the bank should start to climb slowly, a number of consecutive small hikes would add up.

Lee says that today a qualified buyer on an adjustable rate loan could get a $500,000 mortgage that would cost him $1,964 a month to pay off over 25 years.

One rate hike would add $58 a month to their monthly payment, while four hikes would bring it to just over $2,200 a month. Their mortgage rate would only have increased by one percentage point, from 1.35% to 2.35, but their actual payment would have increased by more than 12%.

And it is only with four rises, not the six or seven that the market anticipates. Calculations that add up quickly could be hard to swallow “if someone is on a really tight budget and they don’t want to have to worry about their payments fluctuating,” she said.

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