In a scheduled announcement on July 14, 2021, the Bank of Canada kept its target for the overnight lending rate at its effective lower bound of 0.25%. The Bank also adjusted its Quantitative Easing (QE) program lower to a target of up to $2 billion of Government of Canada bonds weekly to reflect “continued progress towards recovery and the Bank’s increased confidence in the strength of the Canadian economic outlook.”
The Bank said economic growth in Canada slowed in the second quarter as the third wave of the Coronavirus hit. Despite this, falling COVID-19 cases, progress on vaccinations, and easing containment restrictions all point towards a strong pickup in the second half of 2021. The Bank now expects Canadian GDP growth of around 6% in 2021—slightly lower than was expected in April’s Monetary Policy Report—but it has revised up its 2022 forecast to 4.5% and projects over 3% growth in 2023.
The Bank expects the Canadian economic recovery to be led by consumption as households return to more normal spending patterns. At the same time, it expects housing market activity to ease from record levels, which data shows is already well underway.
Looking ahead, the Governing Council judges “the Canadian economy still has considerable excess capacity, and that the recovery continues to require extraordinary monetary policy support.” It also stated it “remains committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved.”
In the Bank’s July projection, this happens sometime in the second half of 2022. The Bank also stated it will “continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.”
Effective June 1, 2021, the minimum qualifying rate for all mortgages is the greater of the mortgage contract rate +2% or 5.25% as set by the Office of Superintendent of Financial Institutions (OSFI) and the Department of Finance. All mortgage applicants must qualify for financing based on an interest rate no less than the benchmark five-year lending rate, even if the mortgage is for less than five years.
Canada’s major chartered banks are currently advertising five-year fixed mortgage special interest rates of around 2.44%. Home buyers can often negotiate the interest rate for mortgage financing based on their creditworthiness and the degree to which they do other banking business with the mortgage lender.
The Bank of Canada’s next scheduled interest rate announcement will be on September 8, 2021. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in its Monetary Policy Report on October 27, 2021.
Learn more about the impact to Canada’s housing markets on CREAStats.ca.