Interest rates are holding steady. Here’s what that means for inflation, housing

The Bank of Canada did not hike its benchmark interest rate on Wednesday despite pressure to cool surging inflation and a red-hot housing market. The central bank’s officials did signal change was on the horizon though and offered hints at where consumer and housing prices could head in the months to come.

Governor Tiff Macklem said in prepared remarks to reporters that the central bank’s “emergency policy settings” tied to the COVID-19 pandemic are done as the country’s top economic officials lifted their commitment that held Canada’s interest rates at rock-bottom levels.

Though some economists expected the Bank of Canada to act with its first policy rate announcement of the year, Macklem said an expectation of reduced spending in the first quarter of the year tied to the Omicron COVID-19 wave was among the leading factors holding back an interest rate hike.

He said interest rates are now on a “rising path,” however, with increases expected over multiple steps in upcoming announcements, the next of which comes on March 2.

Meanwhile, the annual rate of inflation sits at a 30-year high and Canadian housing prices are expected to climb, with no immediate rate hikes to discourage higher lending.

Here’s what to expect on home prices and the impact at the grocery store from the Bank of Canada’s most recent decision to hold interest rates.

The Bank of Canada signalled in a monetary policy report released alongside its interest rate decision Wednesday that prices will continue to rise at a rapid clip in the first six months of the year.

The central bank expects inflation will remain around five per cent for the first half of 2022 before falling back down to three per cent by the end of the year and back towards the target rate of two per cent by 2024.

That forecast bakes in a number of variables — global supply chain constraints and persistent impacts from the pandemic among them — with the bank noting uncertainty around inflation is “unusually high.”

But there’s a potential for some easing of prices as well, the bank hinted at in the report, as consumer demand shifts away from some goods.

Macklem explained that consumers benefiting from a stronger economy have been spending their dollars on goods more than services, driving up demand and prices accordingly. 

Some examples might be people buying more food at home than dining out at restaurants or buying home workout gear rather than paying for a gym membership, he said.

But as Omicron cases appear to peak in some parts of Canada and provinces signal plans to reopen, that spending could shift back towards services and a possible reversal in prices.

“In that scenario, it’s not that hard to imagine that you get some reversal of goods prices,” Macklem said.

If that situation plays out and other variables in the Bank of Canada’s forecast are resolved, inflation could in fact drop faster than predicted, possibly falling below two per cent in 2023.

But because the global causes of inflation like supply chain constraints are largely beyond Bank of Canada’s policy controls, immediately raising interest rates — the bank’s primary tool for tamping down inflation — would likely have had little impact on the costs of goods at the grocery store, experts note.

“That’s one of the limitations of your domestic interest rate. It’s not going to have a large impact or any sort of impact on some of these global pressures,” says Sri Thanabalasingam, senior economist at TD Bank.

“Supply chain disruptions are still going to inflate prices even though we’re going to see domestic interest rates rise,” he says of the Bank of Canada’s signal on future rates.

“It’s just costing more for things to get from point A to point B,” personal finance expert Rubina Ahmed-Haq says.

“So this idea that we’re going to raise interest rates and all of a sudden the cost of your strawberries is going to come down, I think is not the right way to really look at what’s happening.”

Similarly, though an interest rate hike tends to limit how much prospective homebuyers can afford to spend and puts pressure on monthly payments for owners — especially those with variable-rate mortgages — there are factors affecting housing prices that are beyond the bank’s control.

Senior bank officials pointed to a continued lack of supply as the most significant cause of inflated housing prices.

“Overall, the bank’s view is that the most important thing that will restore balance to the housing market in Canada is an increase in supply,” said senior deputy governor Carolyn Rogers on Wednesday.

“We think housing activity will stay elevated for a while. Certainly, our message today that interest rates are on a rising path will feed through to mortgage rates and likely moderate demand over time.”

Phil Soper, CEO of Royal LePage, told Global News on Wednesday that even if the bank had moved to increase interest rates by 25 basis points, Canada’s housing market is “so out of balance” that such a move would not have made a “significant dent” in prices ahead of the spring season.

Leah Zlatkin, mortgage broker and expert at LowestRates.ca, says homeowners who were fretting about a possible rate hike and its impact on their mortgage payments should not expect this period of relative calm to last much longer.

“I think that today’s announcement by the Bank of Canada is simply delaying the inevitable,” she told Global News.

“I do think that there will be rate increases coming, and I certainly think that anybody in Canada who has a variable-rate mortgage should be aware that rates may be going up.”

Zlatkin says there might be a window now where homebuyers looking to enter the market in three-to-four months could get qualified for a mortgage and lock in a fixed rate based on current interest rates.

But both she and Soper stand by variable-rate options as a better-performing option in the long run for most mortgage holders, even amid current uncertainty.

“If history is a guide, they will still do better in the future. But it all depends on that family, that person’s tolerance for risk,” Soper says.

Both also noted that the federal government’s stress test requirements, which sees Canadians qualify for mortgages at rates higher than what they’re initially paying, could see the housing market weather upcoming rate hikes without an overwhelming level of defaults.

— with files from Global News’ Anne Gaviola