- Today’s Announcement: No change to rates
- Overnight rate: 0.25%
- Prime Rate: 2.45% (also no change; see Prime Rate)
- Market Rate Forecast: No BoC hikes until late 2022
- BoC’s Headline Quote: “The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In our projection, this does not happen until into 2023. “
- BoC on the Economy: “Beyond the near term, the outlook for Canada is now stronger and more secure…The outlook remains highly conditional on the path of the virus and the timeline for the effective rollout of vaccines.”
- BoC’s Full Statement: Click here
- Next Rate Meeting: March 10, 2021
The Spy’s Take
The Bank stated the obvious: “lockdown measures are a serious setback.” But the market is looking through it. Yields and the loonie rose after the BoC lifted its long-term economic outlook. The market, which factors in virtually all knowable information, believes inflation (and rate hikes) will return faster than the BoC’s narrative suggests.
The Bank gave no hints about cutting rates further. Leading up to today, there was ample speculation about a potential “micro-cut” — a 10- or 15-bps rate drop. That now “seems nearly ruled out ahead,” said CIBC economist Avery Shenfeld this morning, as reported by Bloomberg.
How to Play It
For 2021, analysts see almost no chance of a BoC rate increase. The BoC repeated its projection today that its main interest rate should hold at 0.25% until “2023.”
Meanwhile, the market increasingly believes that rates will be higher five years hence, as the following chart shows.
The #1 question on the minds of countless rate borrowers is, when will bond yields finally lift off and signal we’re getting closer to a prime rate hike?
Bay Street analysts and investors think it’ll start happening by the second half of this year. But that’s mostly guesswork. As we’ve repeated since June, until the 5-year bond yield closes above roughly 0.60%, there’s little chance of a meaningful bump higher in mortgage rates.
From the looks of it, new variable-rate borrowers will get a head start on fixed-rate borrowers by at least 12-24 months. But if the BoC begins hiking as planned in 2023, that narrow variable-rate advantage could evaporate in short order. (For more on that, see this analysis [PDF file].)
And it should be noted that market expectations are now for the first hike in mid 2022. The market is usually somewhat more reliable than central banks in predicting rate turns.
Given all this, today’s BoC statement does nothing if it doesn’t reinforce one thing. Variable-rate holders will enjoy many more months in the sun, but the least risky path for average homeowners is a 5-year fixed from a fair-penalty lender…one with flexible refinance options.