July 2021 Mortgage Update

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Bank of Canada Interest Rate Update

On eight scheduled dates each year, the Bank of Canada issues a press release announcing its decision for the overnight rate target, together with a short explanation of the factors influencing the decision. This announcement can provide critical insight into the economy as well as the future timing and direction of fixed and variable mortgage rates. The most recent announcement was on July 14th and key quotes were as follows:

Monthly Headlines

“The global economy is recovering strongly….with continued progress on vaccinations” [however] ”COVID-19 variants is a growing concern, especially for regions where vaccination rates remain low.”

“The Bank now expects GDP growth [in Canada] of around 6% in 2021 – a little slower than was expected in April – but has revised up its 2022 forecast to 4 1/2 percent and projects 3 1/4 percent growth in 2023.”

“Housing market activity is expected to ease back from historical highs”

“Employment has once again begun to rebound, and we expect the hardest-hit segments of the labour market to post strong gains as the economy re-opens.”

“Inflation is likely to remain above 3 percent through the second half of this year [top of the 1-3 percent inflation control target] and ease back towards 2 percent in 2022.”

“The Governing Council judges that the Canadian economy still has considerable excess capacity…We remain committed to holding the policy interest rate at the effective lower bound until economics slack is absorbed…”

“In the Bank’s July projection, this happens sometime in the second half of 2022.”

Key Takeaways

Key takeaways? In summary, the Bank of Canada (BofC) reiterated its stance about an expected economic rebound but does hedge this statement with warnings about COVID-19 variants. The BofC also projects the housing market to ease back from historical highs. With respect to the impact on mortgage rates:

Variable Rates – as variable rates are linked to a Lenders’/Banks’ Prime Lending rate, any interest rate movement by the Bank of Canada typically results in an immediate change to variable rates. Based on the most recent outlook, the BofC suggests the earliest it would increase its rate would be “the second half of 2022”. This is in line with their July monetary policy projections.

Fixed Rates – fixed rates are based on the bond yield market (5yr fixed mortgages typically follow the Canada 5yr Bond Yields) which is the market’s view/prediction of where interest rates will be in the future. The July 14th announcement was generally in line with expectations which had minimal impact on yields. Fixed-rate mortgages look to have settled in at their current levels and we don’t anticipate any significant changes (up or down) in the near term.