In this morning’s scheduled rate announcement from the Bank of Canada, they confirmed that they will be maintaining their overnight rate, which is exactly what was expected. No surprises here, and anything else would have been a shock. The overnight rate is what lenders use to set their prime rate, which will remain at 2.45%.

 

The Bank of Canada’s Shift In Stance
For the past year, the BOC was committed to holding their rate until sometime in 2023. Based on new projections, they are now expecting to increase it in the second half of 2022. This doesn’t mean that this will happen, and it’s still possible that they could revert to their original projection. Time will tell. They are committed to holding the status quo until their “2 percent inflation target is sustainably achieved.” Until we get to that point, the rate will remain where it is.

The reason for the shift in their stance is largely due to improved outlook surrounding the Canadian and global economies. The severity of the current state of the pandemic created by the third wave of COVID-19 was not expected. However, the economy has been resilient, and has been outperforming previous expectations. With new COVID infections at their highest levels since the start of the pandemic, and new lockdowns in effect, there remains a high level of uncertainty. Not to mention, vaccine rollouts have been slower than expected, which has not helped the current situation.

The Bank of Canada is still expecting strong growth for the rest of 2021 and beyond, but this can abruptly change depending on how the pandemic evolves.

 

What We Can Expect From Fixed Mortgage Rates
Fixed mortgage rates rose sharply starting late February and continued until late March before leveling off. Over this period, fixed mortgage rates increased by approximately 0.50% across the board. They’ve been relatively stable for the month of April. While I was expecting them to settle back down before the summer, I’ve since moved from this stance. The positive economic outlook has been holding them steady, and further increases are possible.

With the news about the increase to the overnight rate potentially coming ahead of schedule, bond yields have increased 6% over yesterday. If there is evidence of a new upward trend, then further increases to fixed mortgage rates can be expected. It’s still too early to tell however.

 

Variable Rate Mortgages Are Very Attractive
Even with the shift in the Bank of Canada’s projection on potentially increasing their overnight rate earlier than expected, variable rate mortgages are looking more attractive. The spread between fixed and variable is the largest it’s been in years, which gives you added protection against increases to prime rate. When the Bank of Canada starts increasing their rate, I would expect them to move fairly slow. There is also nothing to to say that it won’t increase, only to have it fall back down again. For my full take on fixed vs. variable, I would recommend checking out my blog on the The Ultimate Guide To Choosing Fixed Vs. Variable

With all the uncertainty surrounding the current state of the pandemic, anything can happen, and these projections can change. All we can do is speculate based on the information we have today.

 

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