The Bank Of Canada’s first announcement of 2022 confirmed that rates are to stay the same, at least for now - with the benchmark remaining at 0.25%, and the Prime Lending Rate remaining unchanged.
The bank acknowledges that interest rates “will need to increase,” and is continuing its reinvestment phase.
A Strong But Uneven Recovery
Much of the Bank's decision this morning stems from its concern of high inflation as the world gradually recovers from the pandemic. In a statement following the announcement the Bank noted: “As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target.”
While recovery is strong, the Bank highlights the road to economic growth is also uneven, and therefore is cautious of the affects increasing rates will have as countries feel surmounting pressure to normalize sooner than they may be ready.
Additional Highlights From Today’s BoC Announcement:
- The economy entered 2022 with considerable momentum, and a broad set of measures are now indicating that economic slack is absorbed
- With strong employment growth, the labour market has tightened significantly with elevated job vacancies, strong hiring intentions, and a pick-up in wage gains
- Elevated housing market activity continues to put upward pressure on house prices
- Omicron is “weighing on activity in the first quarter” but is expected to be less severe than previous waves
- The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation
- After GDP growth of 4.5% in 2021, the Bank expects Canada’s economy to grow by 4% in 2022 and about 3.5% in 2023
A Look Ahead
Contrary to recent predictions calling for a hike this week, the BoC remains committed to its conservative approach with respect to rate increases. Acknowledging that the variant continues to affect economic activity unevenly across sectors, the Governing Council believes that overall slack in the economy is now absorbed, and the stage is set for increases in 2022.
The question most commonly asked: Variable or Fixed? And when should we lock-in?
Our recommendation is to continue to take advantage of the Variable-rate mortgage for the following reasons:
- Variable-rate mortgages offered at ~1.50% or lower.
- Lock-in fixed-rates are ~2.79% or higher.
- Flexibility: given the average live of a mortgage is 3.5 years or less, if you ever have to break your mortgage, the prepayment penalty on a variable (typically three months’ interest) is considerably less than what you will be charged on fixed-rate mortgages.
- The interest savings spread (125bpts+) are too great to ignore with a variable-rate mortgage today.
- If you are concerned with ‘payment shock’, we recommend setting your payments as if you it was at today’s fixed rate. You will absorb the impact of short-term rate hikes and still receive interest savings benefit.
If you require further assistance with your mortgage strategy, reach out to Nest today!
