The new COVID-19 variant has "injected renewed uncertainty" into the economy
As the Omicron COVID-19 variant gathers pace while inflation surges, the Bank of Canada faces a difficult choice on its benchmark policy rate, according to a prominent mortgage executive.
James Laird (pictured top), RateHub.ca co-founder and CanWise Financial president, told Canadian Mortgage Professional that interest rate hikes would be contingent on continued positive news on Canada’s recovery from the pandemic – but that inflation remained a “very significant” concern.
“Really the only reason rates are at a record low and have been for two years is because of COVID, and so as COVID persists and there’s uncertainty around it, that is a very material factor – and it will be through 2022,” he said.
“For rates to go up, the pandemic needs to be fairly over. The economy needs to be functioning like it did before we’d heard of COVID, and employment rates need to be the way they were before COVID. All these things need to be in line.”
Still, if inflationary concerns continue to escalate and surpass the Bank’s current projections, it could be compelled to act on interest rates even with the pandemic continuing at a significant pace, Laird said.
“The one factor they’ve got to balance against those things is inflation,” he said. “Even as the pandemic is persisting, if inflation is more embedded and less temporary than they think it is, that could force them to make a tough decision between pandemic stimulus and keeping inflation in check.”
In its final scheduled announcement this year on its benchmark policy rate, the Bank revealed that it would keep that rate steady at 0.25%, also holding firm on its forecast that rate increases were likely to begin sometime in the middle quarters of 2022.
That verdict arrived despite some speculation that the Bank would push forward its projection on the timeline for rate hikes to January in response to an inflation issue that’s rarely been far from the news in recent weeks.
However, the Bank also made clear that it was “closely watching” inflation expectations, saying that it anticipated inflation to remain at an elevated level in the first six months of next year before gradually easing back toward its targeted 2% mark around the second half of 2022.
Laird said that the Bank’s decision to stay the course on its projection for future rate hikes wasn’t an overly surprising one, given those Omicron concerns and other considerations including flooding in British Columbia and a still-disrupted supply chain.
The Bank identified those supply bottlenecks as having a negative impact on aspects of the country’s GDP such as non-commodity exports and business investment.
With rate increases on the way at some point next year, it might follow that many Canadians will rush to lock in current favourable fixed rates. However, Laird said that the fixed-vs-variable debate remains a matter of personal preference, with both options holding their own appeal.
“Even in light of the fact that everyone knows the outlook for rates is up, variables are very popular,” he said. “We still have a variable rate of less than 1% for high ratio, so people are looking at it and saying, ‘Prime’s got to go up about six times, by a point and a half or so, for this to be the same as the fixed rate I can get today.’”
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While more risk-averse customers might prefer to lock in, others may opt for saving money through variable options in the beginning and then continuing to monitor when the variable rate might become equal to the original fixed rate on offer.
As for the mortgage market’s prospects at the turn of the year? While there was no letup in housing and mortgage activity between December 2020 and January this year, Laird said that some degree of normality was likely to resume at the commencement of 2022.
“I think we’ll have a more normal seasonal curve next year where the first quarter will be quieter than it was in 2021,” he said. “Last year, the market just kept right on going through Christmas and in January – there was no break.
“So, I think we’ll follow a bit more of a normal seasonal pattern where it’ll be quieter in January and February, and the spring market will heat up like it usually does.”
