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Bank of Canada Hits Snooze on Interest Rate Hikes – Homebuyers Breathe a Sigh of Relief

In March 2023, the Bank of Canada decided to maintain its key interest rate at 4.5% after a year of rate hikes that saw it climb to its highest level since 2007. The decision to hold its key rate comes after the central Bank rapidly raised rates eight consecutive times over the past year and is based on its assessment of recent data. Real Estate Canada is cautiously optimistic about this decision.

The Central Bank relies on the Consumer Price Index (CPI) to determine monetary policy, which it carries out by influencing short-term interest rates. It does this by adjusting the target for the overnight rate on eight fixed dates each year. The primary objective is to ensure that inflation stays within a range of 1% to 3%, with a desired rate of 2%.

In response to the COVID-19 pandemic’s economic impact, the Bank of Canada reduced its policy interest rate to 0.25% in 2020. However, to curb high inflation, the Bank has steadily increased its policy interest rate over the past year, starting from January 2022, with a total increase of 425 basis points.

The recent spike in inflation, which reached a 39-year high of 8.1% in June 2022, has prompted the Bank of Canada to take measures to slow down the economy. Although inflation has decreased to 5.9% in January 2023, it remains elevated and above the acceptable limit set by the Bank of Canada.

Feeling the Love with Interest Rate Hikes

Homeowners have experienced the love, AKA significant impact, that the recent interest rate hikes by the Bank of Canada can have on their budget if they renew their fixed-rate mortgage or take out a loan. For those with a fixed-rate mortgage, higher interest rates could lead to increased monthly payments, especially if the mortgage balance at the time of renewal is substantial and the new amortization period is short. It is recommended to contact your mortgage broker or lender for a precise indication of how your mortgage payments could change.

On the other hand, those with a variable-rate mortgage will likely have already experienced an increase in their payments to mirror the prime rates.

Canadian homebuyers looking to purchase a new home with a less than 20% down payment must pass a stress test to prove they can make mortgage payments at the greater rate – either their lender’s rate or the Bank of Canada’s 5-year fixed rate. With recent rate increases, the stress test will likely become more challenging for some homebuyers.

Therefore, assessing whether one can handle the debt or new loan at a higher interest rate than the current rate becomes crucial before making financial decisions. But there is likely to be good news in the sector soon.

Bond Markets Predicting Interest Rates to Decrease

At the date of this article, the bond markets are indicating that interest rates will likely decrease shortly. There has been a shift in the market’s assessment of future Bank of Canada moves, resulting in a substantial drop in bond yields, particularly in shorter-term issues. For instance, the Canadian 2-year bond yield has declined by almost 40 basis points to 3.58%. Additionally, as of the latest check, the Canada 5-year bond yield significantly influences fixed mortgage rates and has fallen more than 30 basis points.

On April 12, 2023, the Bank of Canada will announce its upcoming interest rate decision and release its quarterly monetary policy report, including updated forecasts. As per the swaps-based implied probabilities, there are now decent odds (40%) of a quarter-point cut occurring at the Bank of Canada’s next meeting, with the markets also factoring in at least 50 basis points of interest rate cuts by this summer.

The Way Forward

The Bank expects the country’s annual inflation rate to return to around 3% by mid-2023 due to weaker economic growth in the quarters ahead, leading to less economic demand and driving down prices. 

Bank of Canada’s governor, Tiff Macklem, has suggested that the Bank will wait and observe before taking any further action, given that inflation is on a downward trajectory. However, this approach is contingent upon the arrival of favourable data. The real estate market in Canada has been affected by changes in interest rates, with sales and prices responding to fluctuations in borrowing costs. 

Recent data suggests that the decline in home sales is temporary, and the market conditions are favourable for home buyers. According to the data, buying intentions have picked up for 2023. This trend is expected to continue with no interest rate hikes in sight and the significant possibility of a decrease. The current low housing inventory also contributes to the rise in demand, leading to multiple-offer bids, which could soon become the norm and pave the way for more properties to be listed.

Experts predict that Canada will witness the beginning of an era of more reasonably priced housing and stability in the real estate sector over the next 3-6 months. With the current market conditions, home buyers should take advantage of this trend and make investments that can yield significant returns in the long run.

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