Bank of Canada holds its target interest rate at 5% in December announcement

Right in time for the holidays, the Bank of Canada is gifting Canadians with rate stability – just what borrowers wanted.

The central bank announced this morning that it is holding its Overnight Lending Rate – which is used as the benchmark to set the prime rate in Canada, and by extension, lenders’ variable borrowing prices – at 5%. This is the BoC’s third consecutive rate hold, following similar decisions in September and October.  

The prolonged hold signals the end of what has been the steepest rate hiking cycle in decades, in which the BoC increased the cost of borrowing a historic 10 times between March 2022 and July 2023 in efforts to tamp down runaway inflation. And it appears those measures haven’t been in vain; the most recent CPI report for October shows the headline number cooled to 3.1% – a considerable turnaround from its high of 8.1% last June. 

BoC Governor Tiff Macklem further enforced expectations that hikes were done in a speech made on November 22, in which he stated, “This tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability.” He also added that given economic growth is anticipated to be sluggish in the next few quarters that “more downward pressure on inflation is in the pipeline.”

Rather than the rate decision outcome itself, analysts are most keenly parsing the language in today’s announcement for hawkish or dovish clues to future rate direction. Third-quarter GDP data revealed growth has been essentially flat from the previous – narrowly escaping the definition of a technical recession, but it's evident conditions are stalling.

The following labour numbers for November, which indicated fewer new positions than expected, practically minted today’s rate hold decision.

“As expected the Bank of Canada held the key overnight rate at five per cent. Overall, the Bank seems pleased that past rate hikes are having the desired effect of slowing inflation, consumer spending and taking the economy out of excess demand,” says James Laird,  Co-CEO of Ratehub.ca and President of CanWise mortgage lender. 

“However, core inflation remains elevated due to high rent and mortgage rates, and the Bank stated that they are still prepared to raise the overnight rate further if necessary.” 

As per the BoC’s announcement: “With further signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet.”

“Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed. Governing Council wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.” 

With that said, the focus now turns to when the BoC will start to cut rates – and by how much. Economists largely anticipate a decrease could be in the cards as early as March or April, depending on how inflation and jobs numbers pan out. In a recent interview with the Financial Post, Benjamin Tal, Deputy Chief Economist at CIBC Capital Markets, stated he expects a total of 150 basis points (1.5%) in cuts from the BoC in 2024. 

A new era of rate stability

Today’s announcement will have the greatest impact on variable-rate mortgage holders, who see their borrowing costs directly impacted by the BoC’s rate decisions. There will be no change in payments to borrowers with adjustable-rate mortgages – those that fluctuate directly with the prime rate – as well as those on fixed-payment schedules.

The latter has been particularly stressed by the BoC’s hiking cycle, as each hike meant less of their payment went toward their principal debt, with more towards interest. Many borrowers eventually hit what’s referred to as their “trigger rate”, at which their payment no longer services their principal, resulting in a negatively amortizing mortgage. Lenders have had to get creative to keep these loans viable, with measures such as temporarily extending amortizations on paper in order to prevent them from being interest-only. As a result of today’s hold, borrowers who have not yet hit their trigger rate are unlikely to do so moving forward.

“This is a good news announcement for mortgage borrowers,” says Laird. “Anyone who currently has a variable rate or home equity line of credit (HELOC) will be pleased that inflation is moving in the right direction, which could mean rate cuts at some point in 2024.”

Fixed mortgage rates, while not directly influenced by the BoC’s rate policy, will see some downward action as the bond market rallies. As rate hikes devalue existing bonds, today’s investors are cheered by the end of the hiking cycle; as demand grows for bonds, yields drop, which in turn gives lenders the financing room to lower their fixed mortgage rates. Today’s five-year government bond is currently in the 3.4% range, a 70-basis-point drop from the highs seen in late October. As a result, fixed mortgage rates have been discounted in recent weeks, with today’s lowest insured five-year fixed option at 5.19%.

“The bond market is now at its lowest point since May, which means fixed rates should continue to come down from their October highs,” Laird adds.

The impact on the housing market

Steep borrowing costs have drastically chilled real estate demand since last spring. While prices have remained sticky, fewer sales are now effectively pulling them lower; the latest national report from the Canadian Real Estate Association indicated average home prices declined in the majority of markets, resulting in flat growth month over month and just a 1.8% annual increase. 

That has improved affordability conditions for buyers in most markets across the country, according to a recent study from Ratehub.ca – and today’s rate hold will only further bolster buyer confidence once the holidays have passed.

“Since it is December, this good news announcement will likely not have much of an effect on the housing market, which is already on its usual seasonal slowdown. Anticipation for future rate cuts could support a housing market rebound in the new year,” Laird says.

Also read:

• Bank of Canada holds its target interest rate at 5% in October announcement
• Housing affordability improved in October as home prices chill
• GTA home sales slump in November due to steep mortgage rates
• The trigger rate: Everything you need to know