Recap from the January 26th Interest Rate Announcement

Throughout the global pandemic, The Bank of Canada has created emergency policies to ease the economic strain on the country. One of these policies that they implemented was to decrease the overnight lending rate. This rate is a tool in the monetary policy that the BOC uses to influence the money supply in the economy. Over the past two years, the overnight lending rate has been at a historic low of 0.25%. As a result of a historically low overnight lending rate, variable rate holders in Canada have benefited from very low interest rates since the onset of the pandemic. 

On January 26th, The Bank of Canada (BOC) held its first interest rate announcement of 2022. The decision in the first announcement was that the BOC is going to hold the interest rates steady. So, until the following announcement on March 22nd, Canadians can expect the overnight lending rate to stay at 0.25% and thus their variable rate interest rates to hold steady.

Despite holding the rate steady, the announcement came with a forewarning on what the near future holds for the Canadian overnight lending rate. Essentially, the announcement today marked the end of the emergency policies that the BOC has implemented to keep the economy moving forward during the Covid 19 pandemic. The Bank of Canada made it clear they will no longer hold the overnight lending rate at 0.25% and that interest rates hikes are coming this year.

Canada's GDP growth in the second half of 2021 was more robust than what was initially forecasted. In addition, the country's labour market has been ramping up and is experiencing pre-pandemic level job availability and hiring intentions. The Bank has determined that the economic slack from the pandemic is now absorbed. The Canadian economy also satisfied the conditions outlined in the Bank's forward guidance plan. Therefore, they are in a position to begin raising rates.

This cautious decision to maintain the rate at 0.25% on the 26th was mainly due to the current Omicron-induced restrictions. This variant's wave will undoubtedly impact the economy during the first quarter. However, the severity of the impact will depend on the length of the wave. Only time will tell in this case.

The BOC explained that they would be using the upcoming increase in the overnight lending rate as a tool to control the booming inflation. Inflation has been above the Bank's upper target of 3% for the past nine months. The BOC is expecting this trend to continue on an upwards trajectory as inflation is projected to reach almost 5% in the first half of 2022.

Various factors contribute to the growing inflation in Canada. The 2 most notable factors have been in the unexpected Real Estate boom and the supply constraints, which increased prices of goods and services across the country. In addition, energy and food price increases have also been a significant contributor to the rapid inflation growth. The BOC needs to use interest-increasing measures to control inflation and bring it back to the target of 2%. As the pandemic fades, conditions will normalize, which will also help inflation.

What does this mean for Canadian Borrowers:

If you have a variable-rate mortgage, your rate is going to start increasing over the coming months. If you have a fixed-rate mortgage, your mortgage rate will not change. It’s important to remember that changes to the overnight lending rate affect variable holders, not fixed-rate holders.

Check out our blog post from last week where Renée Huse, Owner of Spire Mortgage Team, talks about the option to move to a fixed-rate mortgage vs. maintaining your variable rate by CLICKING HERE
If you would like to discuss how this directly affects your personal situation and monthly cash flow, please connect with us! We’d love to run some numbers and help you make some decisions about how to best move forward.