Key points from the Bank of Canada October 2021 announcement:
- The Bank of Canada holds the overnight lending rate at 0.25%. There were no changes to the retail prime rate, which currently sits at 2.45%.
- The Bank of Canada announces the end of the Quantitative Easing program, which saw them purchase ~$4B in bonds per week. This is a sign that we’ve made it through the worst of pandemic-related risks.
- Recovery from the pandemic remains uneven, and the BoC believes that core inflation will settle back down to their 2% target next year.
Bank of Canada keeps the prime rate unchanged, but announces an end to quantitative easing (QE) program.
Today was one of the most anticipated Bank of Canada announcements in recent memory.
As inflation rises in Canada and around the globe, more and more pressure is mounting on the Bank of Canada to change the policy rate to address fears of runaway inflation.
The BoC is having to walk a very fine line…
On the one hand, we have historic inflation. Traditionally, raising the prime rate is the main mechanism to slow inflation. It’s worth noting that many economists and pundits believe that the inflation is “transitory” and short term, being caused by supply chain issues.
On the other side we have a recovering economy that is in transition from pandemic lockdowns. If the BoC raises rates too soon, they risk stalling a fragile recovery.
Today’s announcement by the BoC was measured and reasonable to address this conundrum. They are aware of the inflation risk and are willing to act if it proves to be ongoing. However, they are also aware it’s too soon to start raising rates.
You can read the full press release here.
What does this mean for rates?
With the pullback of bond purchases and mounting expectation of policy rate increases in 2022, the Government of Canada’s 5 year bond yields have risen sharply over the past 2 weeks. This has translated into a +0.50% rise to fixed-rate mortgages in late October, which currently sit around 2.39%.
Variable rate mortgages remain priced around 1.45%.
Despite the possibility for the prime rate to increase in 2022, I don’t believe it’s an appropriate time to convert a variable rate into fixed.
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