Interest rates won’t rise until at least 2023

The pandemic has forced most of us to learn to live with a good dose of uncertainty when it comes to our ability to make even short-term plans.

But despite being faced with unprecedented challenges brought on by COVID-19, Canada’s central bank still has to confidently make strategic policy choices with an eye to the seemingly distant future.

So, when the bank said last week during a regularly scheduled announcement that it would not be moving its key interest rate from the current historically low level of 0.25 percent, many read deeper into its language.

Several economists well-versed in parsing its announcements arrived at this conclusion: the bank is comfortable keeping interest rates at their current level until at least 2023.

At the outset of the pandemic, the Bank of Canada slashed its key interest rate, also known as the overnight rate, several times in quick succession to stabilize the economy. The bank has since signalled that it will not move the rate any lower than the current 0.25 percent level, calling it the “effective lower bound.” But, it has also said that it won’t be ratcheting the rate back up until certain economic recovery criteria have been met.

“The Bank of Canada’s pledge today to keep the policy rate unchanged until the ‘2 percent inflation target is sustainably achieved’ implies that it has no plans to raise interest rates until at least 2023,” wrote Capital Economics’ Stephen Brown in response to the bank’s announcement last week.

TD Senior Economist Brian DePratto echoed this assessment, noting that the heavy toll the pandemic has taken on the economy and the uncertainty in the months and years to come require the Bank of Canada “to stay in repair mode for some time.”

While the Bank of Canada rate announcements may not be marked on the calendars of most homebuyers, they play a critical role in determining where mortgage rates are heading in the years to come. Mortgage lenders are sensitive to where the central bank’s key interest rate is moving and adjust their borrowing rates accordingly.

The current low mortgage rate environment is a major reason why many experts believe Canada’s housing market — which posted a strong performance in June — will bounce back relatively quickly from the economic downturn and widespread business shutdowns spurred by the pandemic.

“As the real estate market continues to rebound, competitive pressure between mortgage lenders is causing both fixed and variable rates to inch down on a continuous basis,” mortgage comparison site Ratehub.ca shared in an email alert to subscribers following the Bank of Canada’s announcement last week.

Of course, mortgage rates can only fall so low, but with the Bank of Canada’s forward-looking signalling last week, it’s likely that homebuyers don’t exactly need to rush to take advantage of these rock bottom rates.

As BMO Senior Economist Robert Kavcic put it in a research note published last week on the bank’s interest rate outlook: “In case it’s not clear, we’re talking years here, not months or quarters.”