In its final interest rate announcement for the calendar year, the Bank of Canada kept its policy rate at 0.25% while maintaining its forward guidance for the path of the overnight lending rate.
The Bank’s assessment is the global economic recovery from the pandemic is progressing steadily, and highlighted that inflation has increased globally, reflecting strong demand for goods amid ongoing supply chain disruptions. The Bank also raised the new omicron COVID-19 variant as adding heightened uncertainty to the growth of overall economic activity.
The Bank acknowledged recent economic indicators suggest the Canadian economy had considerable momentum into the fourth quarter. This includes broad-based job gains in recent months that have brought the employment rate essentially back to its pre-pandemic level. With respect to housing, the Bank noted activity had been moderating but appears to be regaining strength, notably in the resale market.
Regarding inflation, the Bank noted Consumer Price Index (CPI) inflation is elevated, and the impact of global supply chain constraints is feeding through to a broader range of goods prices. The Bank continues to expect CPI inflation to remain elevated in the first half of 2022 and ease back towards 2% in the second half of the year.
Looking ahead, the Bank stated it remains committed to keeping its policy interest rate at the effective lower bound until economic slack is absorbed to achieve its 2% inflation target, which it projects to occur in the “middle quarters” of 2022. Markets are currently pricing in five interest rate increases over 2022, with a more than 50% chance of a first hike by March.
Mortgage rates
Effective June 1, 2021, the minimum qualifying rate for all mortgages is the greater of the mortgage contract rate +2% or 5.25% as set by Office of Superintendent of Financial Institutions and the Department of Finance. All mortgage applicants must qualify for financing based on an interest rate no less than the benchmark five-year lending rate, even if the mortgage is for less than five years.
Canada’s major chartered banks are currently advertising five-year fixed mortgage special interest rates of around 2.85%. Home buyers can often negotiate the interest rate for mortgage financing based on their creditworthiness and the degree to which they do other banking business with the mortgage lender.
The Bank of Canada’s next scheduled interest rate announcement will be on January 26, 2022. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in its Monetary Policy Report at the same time.
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