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The Market vs. Bank of Canada

December 9, 2021

A handful of economists are saying Canada no longer needs zero-interest rates but the Bank of Canada is saying different.

After leaving its key lending rate at its rock-bottom low, the bank effectively told variable-rate mortgagors on Wednesday that they can keep enjoying historically cheap borrowing costs. That is, until “the middle quarters of 2022.”

That means the prime rate could potentially remain at 2.45% as late as September, 2022, however, the market doesn’t buy it.

The data seems to be not on the bank’s side. December inflation is expected to blow past 5 percent as Canada nears full employment, wages are starting to surge and the last time unemployment was this low, the prime rate was 150 basis points higher. (There are 100 basis points in a percentage point).

Despite the Bank of Canada being at odds with the market, and leaving aside unknowable risks such as the number and the economic impact of continued virus waves, rate hikes are coming. As a mortgagor, Job No. 1 is positioning yourself in the right term given how much you are willing to risk and affordability constraints.

Investors are betting that rates rise 2-3 years, according to Bloomberg data. But, interestingly, consumer sensitivity to rate hikes has those same investors betting that rates will start drifting lower again before the end of 2025.

Given this outlook and current pricing, and assuming you need a new mortgage for at least five years, here are a few options: