Bank of Canada Holds Rates Steady, Ends Quantitative Easing Program

In its penultimate interest rate announcement for this calendar year, the Bank of Canada kept its policy rate at 0.25% while maintaining its guidance for the future trajectory of the overnight rate going forward.

More notably, the Bank also revealed it will be closing its bond buying program, more popularly known as quantitative easing (QE), ending the extraordinary monetary support in the form of liquidity that it has been providing to the financial system.

The Bank’s assessment is the global economic recovery from the pandemic is progressing steadily, despite the existence of several variants of the coronavirus continuing to pose a threat to human health and overall economic activity. Additionally, the Bank noted amid strong demand, growth is still being constrained by pandemic-related disruptions to the production and transportation of goods globally. These supply-side bottlenecks along with higher energy prices have led to inflation picking up in many countries.

Economic recovery

The Bank’s assessment of domestic economic conditions has indicated strong economic growth has resumed in Canada following a contraction in the second quarter of this year. The Bank alluded to the fact that labour market conditions are also improving as evidenced by the strong employment gains in recent months, mostly concentrated in sectors and among workers mostly impacted by the COVID-19 pandemic. However, as the economy reopens, labour shortages continue to persist in some sectors, as both employers and workers continue to search for skills and jobs respectively that are best suited to their individual needs.

Considering this, the Bank now forecasts the Canadian economy to expand by 5% this year before slightly moderating to 4¼ and 3¾ percent in 2022 and 2023, respectively. The Bank anticipates demand will be supported by strong consumption and business investment, along with an uptick in exports as the U.S. economy recovers. The Bank also expects housing activity to remain upbeat, supported by high disposable incomes and low borrowing rates.

Regarding inflation, the Bank noted it had anticipated the uptick in prices but the main contributing factors to this increase (higher energy prices and pandemic-related supply bottlenecks) now appear to be more persistent. As such, the Bank now expects CPI inflation to be elevated into next year and moderate back to around the 2% target by the backend of 2022.

Looking ahead, the Bank stated it remains committed to keeping its policy interest rate at the effective lower bound until economic slack is absorbed to achieve its 2% inflation target, which it projects to occur around mid-2022.

Bottom line: first rate hike will likely be in the spring or summer of next year – sooner than suggested at in the last few announcements and quite a bit sooner than was suggested at the height of the pandemic.

Mortgage rates

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  Office of Superintendent of Financial Institutions 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 2.56%. 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 December 8, 2021.

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