In a hurry: why Canadians should prepare for higher mortgage rates sooner than expected


Well that was a surprise.

The Bank of Canada took a step forward towards easing yesterday’s pandemic stimulus – the largest ever achieved by a large economy – with a hawkish stance that surprised many observers.

Not only did he say he would cut government debt purchases (which was expected), but he also brought forward his schedule for a possible rate hike.

Previously, the Bank predicted that the economic slowdown would not be absorbed until 2023. Today, it expects this to happen in the second half of 2022.

The reason is a much clearer view of the economy. The Bank raised its growth forecast for 2021 by more than two percentage points to 6.5%. He now forecasts 3.7% in 2022 and 3.2% in 2023, a rosier prospect than many economists.

“The Bank of Canada made a dramatic turnaround in the space of three months, going from being extremely cautious to being very optimistic. While there is still some way to go until we get a change on rates, the Bank has taken the first step towards exiting QE, in what is clearly a more hawkish statement than the markets will. planned it, ”BMO Economics Benjamin Reitzes wrote in a post after the announcement. .

The news pushed bond yields higher and the Canadian dollar gained the most in almost a year.

There had been rumblings before that. Markets had already factored in a rate hike in 2022, with swaps suggesting a 50% chance of a hike by the same time next year, Bloomberg reports. Almost three increases are fully integrated over the next two years and five over the next three years.

A survey of Canadian economists by also revealed a shift in expectations.

In an earlier survey in March, more than half of economists believed the rate would hold for at least two years. In the poll taken before the Bank of Canada decision on Wednesday, 88% said they now believe the rate will only hold for two years or less, and more than half (54%) believed the rate will rise in the second half of 2022.

James Laird, co-founder of and president of mortgage brokerage firm CanWise Financial, said if Canada’s recovery proves to be even stronger, the bank may be further accelerating its timeline and Canadians should prepare. to higher mortgage rates sooner than expected.

“Now is the time for anyone who currently holds a variable rate to consider locking in to a fixed rate,” he said, as the positive outlook also means that fixed rates should continue to rise throughout this. year.

“Anyone buying a home should get pre-approval that will maintain current rates for up to 120 days and allow them to move quickly into the competitive spring market,” Laird said.

However, not everyone thinks the bank will grow so quickly.

Stephen Brown of Capital Economics said he remains skeptical about the bank’s ability to manage it before the start of 2023.

“Although the Bank’s new forward-looking orientation implies that it will raise interest rates a quarter before we currently expect it, we remain skeptical of what it will do if oil prices fall in 2022 and if the Fed remains committed to keeping its own policy rate unchanged until late. 2023, as expected, ”he wrote in a note yesterday.

And Carlos Capistran, of BofA Securities, said that if other central banks do not follow suit, the Bank of Canada risks derailing the recovery with higher interest rates and a stronger Canadian dollar – “without great advantage, in our opinion ”.

Bank governor Tiff Macklem himself, while speaking to reporters after yesterday’s ruling, said there was no guarantee that borrowing costs would rise even when the bank deemed that the economy was operating at full capacity.

“What we do when these conditions are met, we will have to evaluate at that time. There is nothing mechanical, “he said, adding,” We are looking for a full recovery, we are not going to count our chickens until they hatch. “

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