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  • Tim Barnes

Bank of Canada Holds Rates, Warns of Elevated Inflation

The Bank of Canada left its key interest rate at 0.25% today, saying the economic recovery continues to require “extraordinary” monetary policy support.

However, it pointed to positive signs, including falling Covid-19 cases, easing lockdown restrictions across the country, and economic activity picking up, despite slower-than-expected growth in the first quarter.

As a result, the Bank repeated its messaging from its last meeting in May that it projects interest rates will start to rise “sometime in the second half of 2022.”

The BoC Sees Inflation Concerns as Temporary

Rising demand coupled with supply shortages has put upward pressure on inflation, which is translating into higher prices for everything from homes and lumber and to cars and gasoline.

The BoC said it expects inflation to remain elevated in the near term, topping out at around 3%, well above its 2% inflation target.

“While CPI inflation will likely remain near 3% through the summer, it is expected to ease later in the year, as base-year effects diminish and excess capacity continues to exert downward pressure,” the Bank’s Governing Council said in its statement.

With the Bank’s target rate expected to be achieved, some observers say that could have an effect on current rate-hike forecasts.

“We remain skeptical, however, that the Bank will raise interest rates in 2022 as its current forecasts imply, given the likelihood that inflation will drop back below 2% next year,” Stephen Brown, senior economist with Capital Economics, wrote in a research note.

“[Even though we] expect inflation to surpass the upper limit of the Bank of Canada’s 1% to 3% range for most of the rest of the year…we continue to think that it will drop back to less than 2% in 2022.”

Implications for Homebuyers

Those in the market for a home or considering a refinance can take comfort in knowing that mortgage rates should remain low for at least the next year.

Five-year fixed rates remain about half a percentage point off their all-time lows seen at the start of the year, and nearly a full percentage point above comparable variable rates.

If you’re unsure which product is best for you, be sure to speak with a mortgage professional who can make personal recommendations based on your current situation.

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