The Bank of Canada made a statement May 30th holding steady on their benchmark rate of 1.25%. Despite three interest rate increases since last July, the Bank of Canada has chosen not to increase again at this time, citing trade uncertainty, the slow housing market, and growing stressors in new markets.

However, economists agree the statement indicates an increase come July. This consensus is probably due in part to how the Bank of Canada’s Governor Stephen Poloz has chosen his words of late. Although he insists his use of certain phrases in past announcements has not been some sort of code-language for what the Bank plans to do next, spectators feel that as the economy grows stronger his comments on future changes has become easier to decipher. Where in the past Poloz has indicated that higher rates will be needed “over time”, May’s announcement was explicit.

“Developments since April further reinforce the governing council’s view that higher interest rates will be warranted to keep inflation near target,” the statement said. “Governing council will take a gradual approach to policy adjustments, guided by incoming data.” In essence, they’re not going to change anything unless they feel certain the economy can handle it.

So, can we handle it? The central bank noted that the Canadian economy was stronger than expected in the first quarter of the year due in part to a stronger sale of exports than was anticipated. The import of machinery and equipment also suggest ongoing recovery in investment. As a result, investors drove up the Canadian dollar by more than a full cent.

An economy functioning close to its potential has an inflation rate of 2%. The central bank uses interest rates to keep inflation at or near that rate, increasing rates when prices exceed that threshold. In April the Bank of Canada anticipated an inflation rate of 2.1% in the first quarter but that is now appearing a bit low. However, it is expected to rise slightly higher than anticipated because of increased gas prices.

Although economists agree that future interest rate increases will come at 0.25% at a time, as they always have, they disagree on how many more hikes will come.

What does this mean for mortgage holders? The variable interest rate is about 1% lower than fixed rates right now, which means it would take four quarter-percent increases to even catch up to where a fixed rate would be at the start. Since comparing mortgage terms is only looking over the next five years, mortgage holders are likely to come out ahead in the five years by choosing a variable rate.

As always, if you have any questions or concerns about the Bank of Canada interest rates, or mortgages in general, please reach out to me at 403-241-3255

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