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Today’s BoC Rate Meeting a Non-factor

Bank of Canada Governor Tiff Macklem

Quick Rundown

  • Today’s Announcement: No change to rates
  • Overnight rate: 0.25%
  • Prime Rate2.45% (also no change; see Prime Rate)
  • Market Rate Forecast: No BoC hikes until at least 2023
  • 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.”
  • BoC on the Economy: “Economic momentum heading into [Q4] appears to be stronger than was expected…[but] record high cases of COVID-19…can be expected to weigh on growth in [Q1] 2021”
  • BoC’s Full Statement: Click here
  • Next Rate Meeting: January 20, 2021

The Spy’s Take

  • Millions of Canadians are hanging on the BoC’s 2023 rate hike forecast. That’s a tenuous strategy if your plan is to lock in “at the right time.” A lot of positive things can happen to our economy in two to three years and fixed rates almost always rise ahead of positive news.
  • Tens/hundreds of billions of dollars of stimulus is still ahead from the Canadian/U.S. governments. That will strengthen the floor under interest rates, suggesting the days of record lows may be coming to an end in this rate cycle.
  • Interestingly, by the end of 2021 the BoC will own almost 50% of the Canadian government bond market if its current bond-buying (QE) pace keeps up, notes CIBC rate strategist Ian Pollick. Above 50% is the danger zone due to adverse liquidity effects, according to the BoC’s own analysis. We wouldn’t bet on QE persisting much into 2022, if at all. This “tapering” of Canadian QE could be yet another factor driving higher fixed mortgage rates unless U.S. yields unexpectedly dive again amidst a weaker-than-expected recovery. That said, until the BoC signals a taper is forthcoming, it’ll try to prevent a sizable run-up in 5-year yields.
  • By the time COVID case counts start heading in the right direction and enough people are vaccinated, both of which should happen by spring-ish or summer, say analysts, the market could start pricing in Bank of Canada policy tightening. That will be a signal to investors to take yields higher (i.e., sell bonds). Higher yields mean higher fixed mortgage rates.
  • There’s one other observation worth noting. Notice how government bond yields are no longer downtrending. That’s despite the grim economic reality of record COVID case counts and further lockdowns. When bad news doesn’t hammer yields, it often suggests the market is gearing up to run in the other direction. That run may not happen for weeks or months (or maybe it will, who knows), but it will happen ultimately.

How to Play It

  • Today’s Bank of Canada meeting changes nothing. The visibility beyond Q1 2021 is little better today than it was in October. Most of the economy (not all) will bounce back next year and the 5-year outlook, therefore, remains arguably more bullish for mortgage rates than bearish. “…We believe the risk is that growth (and inflation) surprises the BoC to the upside next year, so that it may need to [raise rates] ahead of what it currently expects…,” Bank of America said today.
  • For mortgage shoppers, the fixed vs. variable rate decision still hinges mainly on these same factors. One of those factors is the rate spread between 5-year fixed and floating mortgages. It remains historically tight at 30 basis points or less, meaning you’re not paying much for interest rate security. That, plus the fact that Canada’s economy should rebound in 2021 could heighten variable-rate risk as we move into 2022.
  • A few quick comments on specific terms: Unless you have a particular need for 2- to 3-year financing (i.e., a 2- to 3-year fixed mortgage), we’d be hesitant to recommend those terms right now given: (A) their rates are elevated vis-à-vis other terms, and (B) you might find yourself renewing too late — i.e., after the BoC begins hiking rates and after yields run higher. If you need thoughts on other terms, see our quick review on RATESDOTCA.
  • Long story short: Hope is on the horizon. Stocks are making record highs for a reason. Bond yields could follow higher in the not-too-distant future. A bet on variable rates is a bet on a failed recovery. That’s a risky wager when all-time-low 4-year fixed rates and record-low 5-year fixed rates are a bird in the hand.

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  • Ryan says:

    I just gave up my Prime -1.25% (1.20%) variable rate for a 5 year fixed rate of 1.50% for the reasons you stated above. I believe the recovery will be quicker than people think and by the time BoC start to hike rates in 2022 (my opinion) 5 year fixed will likely be above 2.00%. Only time will tell…..

    • The Spy says:

      Hey Ryan, The majority of mortgage pros would probably advise holding on to prime – 1.25% if you’re an existing borrower. At the very least, we would not be locking that in with the 5yr bond yield south of 0.60%.

      That said, peace of mind is worth something to some folks. And who are we to judge. While it’s impossible to know how things play out in the next few years, what you say is definitely *not* highly unlikely.

  • Dave says:

    Is this a call for folks in deeply discounted 5 year ARM (P -0.95% or better) to lock-in?

  • Gary says:

    Scotia is offering me 1.45 Variable and 1.74 5 year fixed for renewal. Are those competitive rates? I have low 800 credit, zero debt and fairly good income. Just wondering if I should go through the hassle of getting a broker. I want to lock in and not worry thanks in advance

    • The Spy says:

      Hey Gary, Yes, those are quite competitive for big bank renewal rates. That said, if your property value was under $1 million when you purchased the home, and you haven’t refinanced (pulled out more money or increased the amortization since) and your mortgage size is big enough (e.g., $300k+), it might be worth a call to brokers to get a quote. Some of the most competitive brokers in Canada are listed on this site so you might want to start with one of them.

  • Peter Zhang says:

    Hi Spy, My current 5 yr. Variable rate is 1.15% with 4.4 yrs. Left fir the term. Should I think about locking 5 yr. Fixed rate now? Thank you.

  • DK says:

    Hey Peter Zhang, I’m shopping for a mortgage and the variable rate you have at 1.15% is ridiculously good. I wouldn’t give it up if I were you.
    I’m closing in on a deal for a variable rate at 1.34% with one of the big banks. (My broker couldn’t come close)

  • HM says:

    Hi Spy, I have 2.89% fixed 3 years term with CIBC with the balance of $780,000 and 17 month remaining, I’m thinking maybe it is worth breaking the contract now. Could you give a idea or formula to calculate how much I would save on the remaining term if I switch to the new fixed 5 year rate 1.5% , assuming no transfer fee with biweekly payment and but with penalty assumed $8840. Your site is very informative. Big thanks!

  • Lynn says:

    CIBC offered me 1.79 for 5 years fixed and now that looks high from the comments I just read.
    I would also have to break my current mortgage with 22 months left. However interest savings would make up for the penalty I would need to pay. I am wondering if maybe I should wait and see what happens in Q1 2021? I don’t think interest rates will go up in Q1… Any feedback would be appreciated

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