In the last scheduled rate announcement from the Bank of Canada on December 8th, they held true to their projection on holding their overnight rate steady until sometime in the middle two quarters of 2022.
The US Federal Reserve has since hinted that they may have to raise their rate sooner than anticipated due to increasing inflationary concerns and a tight job market.
As the Bank of Canada will generally follow the US Fed’s lead, it’s possible that they could also make a move sooner than expected. Potentially as early as their next scheduled meeting on January 26th,.
Following the recent US Fed’s policy meeting in mid-Decemeber, it was projected that they could increase their rate by as much as three times in 2022. Now that 2022 are underway, some leading economists are predicting that they will increase four times.
But what about The Bank of Canada?
There are predictions that the Bank of Canada could one up the US, by increasing as much as five times by the end of the year. Assuming the typical movement of 0.25% per increase, this would mean an increase of 1.25% by the end of 2022.
While this would help with bringing inflationary concerns under control, it would not be good news for our economy.
But what is the likelihood that five rate increases in 2022 will become reality?
While inflationary pressures are pushing the two central banks to increase their rates sooner, the uncertainty around the Omicron COVID variant may force them to sit on their hands for a bit longer. With the next scheduled rate announcement from the BOC coming up fast on January 26th, there is still a big question mark over what we can expect from them on this date.
While anything can happen, I believe the Bank of Canada will leave their rate unchanged. We’re still in the middle of the latest lockdown, which will lead us right up to the next scheduled rate announcement. I can’t see them raising rates. Their next scheduled announcement on March 2nd could be a different story. Anything can happen.
Rate Decreases Will Follow Increases
The faster the BOC increases their rate, the sooner they would need to pull back. They can’t go on a rate increasing rampage for years to come without implementing any cuts along the way. Never has there been a five year period in history where the Bank of Canada has increased rates, but hasn’t also decreased within the same five years. Never. The faster they increase, the sooner they will decrease.
I still think it’s unlikely that we’ll see five increases this year. Especially since the US is only expecting to increase four times (and that’s just a ‘prediction’). I think Omicron will affect rates, and force both central banks to adjust their positions. Time will tell.
One thing that is almost certain is that both fixed and variable rates will rise in 2022.
It’s just a matter of when, and by how much.
Are Fixed Mortgage Rates Now The Better Choice?
Even with multiple increases to prime rate expected, it doesn’t mean that everyone should be taking a fixed rate mortgage. The current spread between fixed and variable is excessively large at roughly 1.25% in most cases. This gives you plenty of protection against rising rates, and I would bet that anyone taking a variable rate mortgage today would come out ahead after five years. The increases are coming, so you just need to be mentally prepared for them.
If you’re the type look to convert your variable into a fixed at the first mention that rates are increasing, then you’re likely best suited to fixed rates.
If you’re the type to start sweating once the rate increases begin, then you might be better off with a fixed rate mortgage from the beginning.
As I always say, the best choice isn’t always the one that saves you the most money, it’s the one that allows you to sleep soundly at night.
Even with recent increases to fixed rates over the last few months, they are still quite low by historical standards.
Upward Pressure On Fixed Rates?
Immediately following the recent news that the US fed could increase their rate sooner than expected, the stock market began to fall substantially. It was a clear reaction (or overreaction) to the news.
While the financial markets were falling, the bond yields began to rise sharply. As bond yields are the largest influencer of fixed mortgage rates, steady upward movement will result in upward pressure on fixed mortgage rates as well.
Despite the yields increasing steadily over the past week, they have not increased enough to warrant upward fixed rate movement. Not a single lender has increased their rate. However, if the bond yields continue to trend upward, then we would almost certainly see increases to fixed mortgage rates follow.
If you’re unsure on whether fixed or variable is right for you, then I would suggest reading the following:
