The Bank of Canada shared its optimistic outlook for Canada’s economic recovery on Tuesday. But that doesn’t mean rate hikes should be expected any time soon.
After its decision to leave the overnight target rate unchanged at 0.25%, the Bank released this message:
“[The economic impact of COVID-19] impact appears to have peaked, although uncertainty about how the recovery will unfold remains high. Massive policy responses in advanced economies have helped to replace lost income and cushion the effect of economic shutdowns,” the BoC said in its statement.
“…the Canadian economy appears to have avoided the most severe scenario…Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery.”
While the Bank expects the economy to return to growth by the third quarter, it cautioned the “outlook for the second half of 2020 and beyond remains heavily clouded.”
“The tone of the statement was modestly more upbeat than in April. However, uncertainty continues to be elevated…” noted Benjamin Reitzes of BMO, adding that the BoC is projecting GDP to decline between 10-20% in the second quarter.
When Could Interest Rates Start to Rise?
With ongoing weakness in the economy, and expectations of additional waves of COVID-19 outbreaks, economists believe no rate hikes are on the table for 2020, and most likely for the entirety of 2021.
“Despite a tentative re-opening of the economy currently underway, in Canada and elsewhere, highly accommodative policy will be needed for an extended period to secure recovery,” wrote economists at National Bank of Canada. “To us, that suggests holding the policy rate at the lower effective bound of 0.25% through the end of 2021, if not longer”
Others see the Bank leaving its overnight rate unchanged even longer.
“The efforts to contain the COVID-19 pandemic have opened up so much slack in the Canadian economy that we do not foresee an increase in the policy rate until 2022,” noted Brett House, Deputy Chief Economist at Scotiabank.
What Does That Mean for Mortgage Rates?
Mortgage rates have been declining steadily in recent weeks, with shorter term fixed rates falling below the psychological 2.00% level.
Lenders have also been gradually increasing their variable-rate discounts from prime, with the lowest nationally available variable rate currently prime – 0.60% (1.85%).
For homebuyers unsure whether to choose a fixed or variable rate in this low-rate environment, a post by Rates.ca determined a variable rate of prime – 0.50 (1.95%) would still come out ahead compared to a 5-year fixed rate of 2.49%, even if the Bank of Canada hiked interest rates three times over the course of the 5-year term.
But it comes out ahead by just a hair—theoretically saving the borrower just $15 per $100,000 of mortgage over the 5-year term.
Borrowers would still have to look at other factors when making their choice, such as mortgage features, flexibility and prepayment costs.
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