BOC keeps rate at 0.25%, while strong economic recovery shifts outlook for future rate changes

The Bank of Canada announced today it’s keeping its overnight rate steady at a record-low 0.25 percent.

While the central bank doesn’t directly set mortgage rates, its trendsetting rate does influence what Canadians pay on variable-rate home loans as well as fixed-rate loans when refinancing or taking out a new mortgage.

The decision to leave rates unchanged was widely anticipated, as the central bank pledged it would maintain rates at historic lows (as it has done since March 2020) to help spur economic recovery in response to the COVID-19 pandemic.

In a new development, the Bank of Canada did announce it will reduce its pace of Government of Canada bond purchases to $3 billion a week from $4 billion. Bond buying is a form of quantitative easing – aka the injection of new money to help boost the economy – and by reducing quantitative easing, the Bank of Canada is signalling economic prospects are improving.

According to the central bank’s press release, economic growth – both globally and domestically – has been stronger-than-expected in the first quarter of 2021, surpassing the Bank of Canada’s forecasts. The Bank now projects global GDP to grow by 6 ¾ percent this year – up from 4 percent projected in January and leaps ahead of the 2 ½ percent contraction experienced in 2020.

“Today’s Bank of Canada announcement includes an optimistic forecast for Canadian and global economic growth, strong commodity prices, job gains in January and February, and a strong housing market,” said James Laird, co-CEO of Ratehub.ca and President of CanWise Financial. “The third wave of infections and lockdowns in Canada was the only note of caution.”

While the Bank of Canada interest rate isn't expected to change in the short term, the better-than-forecasted economic recovery has led the central bank to revise its outlook for future hikes as it now projects to hit its inflation target earlier than anticipated.

“The Bank has changed their commitment to keep rates low through 2023,” said Laird. “They are now forecasting that they might move rates up as early as the second half of 2022. If good news continues across all parts of the economy, it is possible the Bank will move up their timeline even further. Therefore, Canadians should brace for higher mortgage rates sooner than expected.”

Laird continued to say “the announcement is bad news for anyone who currently has a variable rate mortgage as they should now be prepared for prime to move sooner than expected. Now is a good time for anyone currently holding a variable rate to consider locking into a fixed rate. However, staying in a variable rate has proven to be the most cost effective strategy for the last 50 years.”

Laird also pointed to the fact that the “positive outlook also means that fixed rates should continue to drift up throughout the remainder of 2021”.