Photo: James Bombales

In line with economists’ consensus prediction, the Bank of Canada today chose not to hike its mortgage rate-influencing overnight rate.

“As widely expected, the Bank of Canada left the overnight rate unchanged at 1.50 per cent today,” write National Bank economists Krishen Rangasamy and Paul-André Pinsonnault, in a note. “The central bank acknowledged the economy’s strong performance last quarter ─ recall Q2 real GDP growth in Canada was 2.9 per cent annualized ─ but said the economy is evolving ‘closely in line’ with its earlier projections.”

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In its release, the Bank noted that the housing market is “beginning to stabilize as households adjust to higher interest rates and changes in housing policies.” That, combined with an acknowledgement that the debt burden among households is starting to lower, has TD senior economist Brian DePratto predicting that the Bank will choose to hike the overnight rate in October.

“The Bank of Canada made it clear that it is still on track to raise interest rates again this year,” he writes, in a note. “The Canadian economy is indeed evolving in line with its projections, with the desired rotation of demand towards investment and exports, and a stabilization of the housing market after a difficult start to the year…We believe the BoC will raise interest rates at its October meeting, consistent with its gradual approach to policy normalization.”

Rangasamy and Pinsonnault agree that an October hike is likely, though are unwilling to guess what the Bank will choose to do after that.

“Barring a major shock, an October hike looks like a pretty safe bet, but after that the picture becomes murky,” they write. “The Bank has been marking down its growth outlook to account for trade uncertainty – any resolution on the NAFTA front is thus likely to mean a stronger outlook, and by extension, a faster pace of hikes, all else equal.”

As the overnight rate climbs, mortgage rates will also be pushed upwards, possibly causing some would-be buyers to reconsider entering the housing market. Beyond causing a slowdown in activity, a rate increase would weigh on existing homeowners, who might struggle to make higher mortgage payments.

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