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Expectations for future interest rate hikes fell even further following yesterday’s Bank of Canada rate decision.

Up until now, BoC Governor Stephen Poloz had repeated that the overnight rate—currently at 1.75%—would need to reach the Bank’s “neutral range” target of 2.5-3.5%. That implied a minimum of three more rate hikes over the next couple of years.

But a weaker-than-expected slowdown in economic activity in the fourth quarter forced the BoC to change its messaging.

“The outlook continues to warrant a policy interest rate that is below [the bank’s] neutral range,” read the BoC statement

“…it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January,” it continued. “…it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook.”

Observers say that clearly signals a more dovish stance than the BoC has maintained up to this point.

“The explicit hiking bias is gone, but there is still an implicit hiking bias, albeit a small one,” wrote Adam Button, Chief Currency Analyst at ForexLive. “There was a lot of optimism in the BoC from September to January, but it’s all been abandoned in this statement.”

Market Reaction

Markets had long ago priced in only a small chance of a single rate hike in 2019. But the weak GDP data from December has now made that look like a best-case scenario for the BoC, barring a stunning economic turnaround over the course of the year.

It has also caused chatter that the next rate move could be down rather than up. OIS markets had reached an 8% chance of a cut in the coming months, although some say that’s jumping the gun.

Derek Holt of Scotiabank said the BoC’s dovish turn, “has the market thinking of the modest prospect of a rate cut by the end of this year. That may well be premature.” Instead, he said, “the message points toward no rate hike for the bulk of the year at a minimum.”

Tim Mahedy of Bloomberg Economics went even further, saying: “Since the BoC’s January meeting, economic data has underwhelmed; we expect the rate pause to last into at least the first half of 2020.”

What this Means for Mortgage Rates

Following the release of the BoC statement, 5-year bond yields—which lead fixed mortgage rates—broke through a key support level and fell to their lowest point since 2017.

“That portends further fixed mortgage rate cuts, particularly if home prices, consumer spending and/or oil prices keep sliding,” rate expert Rob McLister wrote on RateSpy.com

“We’ve already seen all major banks chop rates over the past two weeks,” he added. “With most 5-year fixed mortgage rates still 180+ basis points above the 5-year yield (normal is closer to 150-160 bps), there are more fixed cuts to come.”

On his blog, mortgage planner David Larock added that the BoC’s dovish turn will reassure variable-rate borrowers that the mainstream media’s warnings about sharply higher rates can finally be put to rest.”

“I don’t expect variable mortgage rates to move higher until our economic landscape looks very different from how it does today,” he wrote, adding, “I (also) think fixed mortgage rates are likely to move lower in the near future.”

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