March 2023 Bank of Canada Interest Rate Update

March 8, 2023

Key points from the March 2023 Bank of Canada announcement:

  • The Bank of Canada announced no change to the overnight lending rate.
  • After 8 consecutive increases today’s pause is welcomed relief and falls in line with expectations.
  • BoC reiterates that the pause is “conditional” and they are ready to increase as the situation requires.
  • The retail prime rate (what you and I pay) will remain unchanged at 6.70%
  • Full press release can be read here.

For today’s Rate Watch email I’m going to present something a little different from normal. I’d like to give you an overview of what has happened with interest rates since the start of the year. Keep in mind that fixed rate mortgages, variable rate mortgages and the Bank of Canada prime are all different and have different factors influencing them.

For the BoC press release click here.

In this email I want to share with you some insights and what we know so far. 

False start.

January started with a lot of optimism. We saw the year start with fixed rate mortgages dropping to the 4.49% range for some high ratio specials. We were fantasizing of a 2023 which would see a steady linear decline of fixed rates followed soon thereafter by decreases to the prime rate.

But then things turned.

The bond market gave us a head psych. 

Like all of us, the bond market was wishfully thinking that the worst of inflation was behind us. Markets were overly eager to declare victory over inflation at the beginning of the year.  Since January 19th bond yields have continued to climb and are now retesting 52-week highs.

That has meant that in the last 3 weeks fixed rate mortgages have climbed again by ~0.25%-0.45% on average. Boo.

But how can rates be rising if inflation is falling?

On February 21st we got the Canadian January ‘23 inflation reading. Headline inflation came in lower than expected at 5.9% vs the forecast 6.1%… so we would have expected Canadian bond yields and by extension fixed rate mortgages to drop. But they didn’t budge. In fact they increased on that day… 

So what gives?

There are two factors.

1- The base-year effect. Inflation is measured compared to the same month last year. January 2022 saw VERY hot inflation of 0.9%. So when comparing January 2022 to January 2023 the base year inflation was very high so the headline reading of 5.9% showed a much more modest decrease to inflation than the number initially suggests. 

2 – When ‘Merica sneezes, Canada catches the cold. 

Since mid-January the US has released week after week of economic data which are all pointing to higher inflation in the US. 

Over the past 2 days Jerome Powell, president of the Fed, has been speaking to congress and given clear indication to the US market that rates will have to rise further.

If the Canadian bond yield drops significantly vis-a-vis the US equivalent then it will impact the Canadian dollar exchange rate which can further drive inflation

Since yesterday the CAD/USD exchange rate has increased and is now approaching $0.70. A lower Canadian dollar means more inflation. 

At the moment a divergence in policy between the US Fed and Bank of Canada presents the biggest risk to interest rates in Canada.

Does that mean rates will increase further in Canada?

My view at the moment is that the Bank of Canada will be happy with the declining progression of inflation in Canada. They will be keeping a VERY close eye on the Canadian dollar and if the dollar devalues too much they may be forced to further increase interest rates which would almost certainly heighten the risk of a deeper recession in Canada. 

Fun times. 

Fixed rate mortgages of course are more volatile as they are impacted by the bond market. It’s hard to say where fixed rates will go in the short term. If US economic data keeps coming in with an inflationary slant then it’s possible to see fixed rates rise further.

Overall I expect Canadian interest rates to remain “sticky” with more upwards pressure than downwards at the moment. 

If you’d like to discuss today’s decision and how it relates to your mortgage, you can contact me here or schedule a convenient call time directly into my calendar below.