Bank Of Canada January 26th, 2022 - "Not Yet!"

While 80% of the market was counting on a rate hike yesterday, the Bank of Canada remained hawkish. The summary below provides a lot of the financial details, if you are interested. Otherwise, read the beginning and then jump down to the 'Looking Ahead for vital information if you are watching interest rates.' 

The next scheduled Bank of Canada (BOC) announcement is set for March 2nd. Going into February, watch the current 5 years fixed mortgage terms. Many lenders increased their rates in anticipation of an increase yesterday, so can we see a slight paring back in February? Don't expect any dramatic drops, but maybe we will be lucky to see .1% or .2% drop. It's hard to say, but if you are contemplating going into a 5 year fixed, it would be worth checking rates regularly in February.

The good news is that CIBC and First National economists are more conservative in their overall estimations of total interest rate increases. They expect 3 increases this year (.75%) and maybe 3 next year. Most experts do not agree with Scotiabank's estimation of 8 increases by 2023 which equals to 2% increase.

A BOC first increase of .25%  won't overly impact the market. However, once it goes over .36% or two quarter increases, buyers will see lenders trim back their capacity. This is because qualifications are based on a 5.25% stress test or 2% over contract rate (or 5 years fixed rate). 

This may start cooling off this overly hot real estate market in the Fraser Valley and Vancouver. A good thing for buyers coping with multiple bids and rising property prices.

Bottom Line: We are in unprecedented times in recent history, trying to come out of a pandemic and now fighting inflation. Experts are all over the map with their predictions, so consumers need to base their decisions on facts and their financial situation. The BOC will raise interest rates, but no one really know how much in total. It will all depend on the net effect on inflation, real estate prices and a host of other factors. Only time will tell!

Here's the full summary:

Bank of Canada holds benchmark interest rate steady, updates 2022 economic outlook

This morning in its first scheduled policy decision of 2022, the Bank of Canada left its target overnight benchmark rate unchanged at what it describes as its “lower bound” of 0.25%. As a result, the Bank Rate stays at 0.5% and the knock-on effect is that borrowing costs for Canadians will remain low for the time being. 

The Bank also updated its observations on the state of the economy, both in Canada and globally, leaving a strong impression that rates will rise this year.

More specifically, the Bank said that its Governing Council has decided to end its extraordinary commitment to hold its policy rate at the effective lower bound and that looking ahead, it expects “… interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving” its 2% inflation target.

These are the other highlights of today’s BoC announcement.

Canadian economy

• 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” and while its economic impact will depend on how quickly this wave passes, the impact is expected to be less severe than previous waves
• Economic growth is then expected to bounce back and remain robust over the Bank’s “projection horizon,” led by consumer spending on services, and supported by strength in exports and business investment
• 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

Canadian inflation

• CPI inflation remains “well above” the Bank’s target range and core measures of inflation have edged up since October
• Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022
• As supply shortages diminish, inflation is expected to decline “reasonably quickly” to about 3% by the end of 2022 and then “gradually ease” towards the Bank’s target over the projection period
• Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target
• The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation

Global economy

• The recovery is strong but uneven with the US economy “growing robustly” while growth in some other regions appears more moderate, especially in China due to current weakness in its property sector
• Strong global demand for goods combined with supply bottlenecks that hinder production and transportation are pushing up inflation in most regions
• Oil prices have rebounded to well above pre-pandemic levels following a decline at the onset of the Omicron variant of COVID-19
• Financial conditions remain broadly accommodative but have tightened with growing expectations that monetary policy will normalize sooner than was anticipated, and with rising geopolitical tensions
• Overall, the Bank projects global GDP growth to moderate from 6.75% in 2021 to about 3.5% in 2022 and 2023

January Monetary Policy Report

The key messages found in the BoC’s Monetary Policy Report published today were consistent with the highlights noted above:

• A wide range of measures and indicators suggest that economic slack is now absorbed and estimates of the output gap are consistent with this evidence
• Public health measures and widespread worker absences related to the Omicron variant are slowing economic activity in the first quarter of 2022, but the economic impact is expected to be less severe than previous waves
• The impacts from global and domestic supply disruptions are currently exerting upward pressure on prices
• Inflationary pressures from strong demand, supply shortages and high energy prices should subside during the year
• Over the medium term, increased productivity is expected to boost supply growth, and demand growth is projected to moderate with inflation expected to decline gradually through 2023 and 2024 to close to 2%
• The Bank views the risks around this inflation outlook as roughly balanced, however, with inflation above the top of the Bank’s inflation-control range and expected to stay there for some time, the upside risks are of greater concern

Looking ahead

The Bank intends to keep its holdings of Government of Canada bonds on its balance sheet roughly constant “at least until” it begins to raise its policy interest rate. At that time, the BoC’s Governing Council will consider exiting what it calls its “reinvestment phase” and reducing the size of its balance sheet. It will do so by allowing the roll-off of maturing Government of Canada bonds.

While the Bank acknowledges that COVID-19 continues to affect economic activity unevenly across sectors, the Governing Council believes that overall slack in the economy is now absorbed, “thus satisfying the condition outlined in the Bank’s forward guidance on its policy interest rate” and setting the stage for increases in 2022.