Why Canadians Should Brace For Higher Mortgage Rates Sooner Than Expected

The Bank of Canada took a step towards easing pandemic stimulus yesterday — the biggest yet by a major economy — with a hawkishness that surprised many observers.

Not only did it say it would reduce purchases of government debt (which was expected), it also brought forward its timeline for a possible rate hike.

Previously, the Bank had forecast that slack in the economy would not be absorbed until 2023. Now it expects that to happen some time in the second half of 2022.

The reason is a much brighter view of the economy. The Bank hiked its growth forecast for 2021 by more than two percentage points to 6.5%. It’s now predicting 3.7% in 2022 and 3.2% in 2023, an outlook rosier than many economists.

“The Bank of Canada has made a drastic U-turn in the space of three months from being extremely cautious to being extremely upbeat. While there’s still some ways to go until we get a move on rates, the Bank has taken the first step toward exiting QE, in what is clearly a more hawkish statement than markets anticipated,” BMO Economics Benjamin Reitzes wrote in a note after the announcement.

The news pushed bond yields higher and the Canadian dollar gained the most in almost a year.

There had been rumblings before this. Markets had already been pricing in a rate increase in 2022, with swaps trading suggesting a 50% chance of a hike by this time next year, Bloomberg reports. Almost three increases are fully priced in over the next two years, and five over the next three years.

A survey of Canadian economists done by Finder.com also found a shift in expectations.

In an earlier survey done in March, more than half of economists believed the rate would hold for two or more years. In the survey taken before the Bank of Canada decision Wednesday, 88% said they now believe the rate will only hold for two years or less, with more than half (54%) believing the rate will rise the second half of 2022.

Click here to read the full article.