Photo: Craig Paterson/Flickr
Today, the Bank of Canada announced it will not be increasing its overnight rate. The move should come as a relief to Vancouver households who are currently grappling with two hikes in 2017 and already poor housing affordability.
The Bank of Canada said it will hold its target for the overnight rate, which influences mortgage rates, at 1 per cent. This decision follows two 25 basis point increases that happened in July and September following a seven year period that saw Canada’s central bank only slash the rate.
As the most expensive market in the country, no rate hike could be beneficial for Vancouver households, according to TD Economics's Brian DePratto.
"It gives everyone a chance to sort of digest the past rate moves and see what the impact has been,” the senior economist tells BuzzBuzzNews.
The central bank made the decision to maintain the overnight rate because the Canadian economy showed signs of moderation in July. A noticeable slowdown compared to the stronger-than-expected economic growth seen at the beginning of the year.
Despite the slight pullback, the bank expects the economy to grow at an above-potential pace next year.
However, the bank’s Monetary Policy Report, published today, states that there are four key risks that are adding uncertainty to Canada’s economic future, including elevated household debt.
In today’s announcement, Bank of Canada Governor Stephen Poloz said the “economy is likely to respond more to higher interest rates at today’s debt levels than historically.”
Higher overall debt levels make households more sensitive to rate hikes, which could potentially put homeownership further out of reach, says DePratto.
The TD economist adds that the impact of higher rates becomes more challenging when housing affordability is stretched, which is the case in Vancouver’s pricey market.
"Every time the rate ticks up, that kind of reduces a little of their [homebuyers] budget effectively for a given amount of income and downpayment,” says DePratto.
In addition to more possible rate hikes, the new mortgage qualification stress test announced by the Office of the Superintendent of Financial Institutions (OSFI) last week will further strain homebuyers trying to enter the market.
As of next year, all uninsured mortgage borrowers will need to qualify at either the Bank of Canada’s five-year benchmark rate, or at their contract mortgage rate, plus an additional two per cent.
"If the situation evolves such that we don't get more Bank of Canada rate hikes, those OSFI B-20 stress tests, they're coming, and that's a done deal. That's going to be a fairly significant headwind,” says DePratto.
In a note published today, Capital Economics Senior Economist David Madani writes that OSFI’s tougher rules will “reinforce the house price correction that’s already underway, with at least some modest negative knock-on effects to household consumption growth.”
Governor Poloz says the bank will observe how households react to the new mortgage regulations and the economy’s sensitivity to higher interest rates when considering rate hikes in the future.
In light of today’s announcement, TD Economics says the Bank of Canada will take some time to assess the impact of prior interest hikes, and, as a result, will hike the rate again in January 2018.
Going forward, the central bank says less monetary policy stimulus will likely be required and the “Governing Council will be cautious in making future adjustments to the policy rate.”
The Bank of Canada is slated to leave the rate at 1 per cent in its final announcement for the year on December 6th.