The Bank of Canada has once again opted to keep its trend-setting Overnight Lending Rate -- the benchmark used by consumer banks when setting their Prime-based pricing -- unchanged. The rate remains at 0.25%, where it has held status quo since March of 2020, when the BoC slashed it from the previous 1.75% in response to pandemic-induced economic upheaval.

That the BoC has chosen to stick within its lower bound in terms of monetary policy is likely a surprise to many policy watchers; overnight swap markets had priced in a lofty 70% chance of a hike in today’s announcement, due to strong labour numbers and run up in inflation to a 30-year high.

However, the Bank is signalling a key change via its language, stating the economy has recovered sufficiently for it to retreat from “exceptional forward guidance on policy interest rates”.

Translation: higher rates are coming, and they're coming as early as March.

Read: This is What Will Happen When the Bank of Canada Hikes Rates

“While COVID-19 continues to affect economic activity unevenly across sectors, the Governing Council judges that overall slack in the economy is absorbed, thus satisfying the condition outlined in the Bank’s forward guidance on its policy interest rate,” states the BoC in their January announcement release. “The Governing Council therefore decided to end its extraordinary commitment to hold its policy rate at the effective lower bound. Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.”

It's widely anticipated that when the Bank does enter its rate-tightening cycle, it will increase between six to seven times to achieve a neutral range between 1.75 - 2%, over this year and next.

Omicron Not Enough to Derail Economic Recovery

Despite initial uncertainty ushered in by the Omicron variant, which has led to partial lockdowns in Ontario and Quebec, the Bank says all data points to a strong, though somewhat uneven economic recovery, both on a global and domestic scale. Notably the US is experiencing strong performance -- while grappling with similar inflationary pressures -- and is also highly anticipated to signal a return to tighter monetary policy cycle next month. This gives the BoC even more impetus to make their move, without outpacing Canada’s largest trading partner, and risking the health of the Canadian Dollar. 

On the home front, the Bank reports the second half of 2021 exceeded expectations in terms of GDP performance, with “a broad set of measures” now indicating economic slack has been absorbed. This has been particularly evident in the job market, with hiring intentions and wages on the uptick, and of course in the Canadian real estate market, as “elevated housing market activity continues to put upward pressure on house prices.”

Overall, it’s expected that Canada’s GDP will grow 4% this year and 3.5% next, while the global economy will expand at a rate of 3.5%, down from 6.75% in 2021. Economic growth is poised to return with a vengeance following this most recent pandemic wave, as consumers and businesses have a strong appetite to spend and invest in a post-COVID world.

Inflation Urgency Remains Top of Mind

Of course, the biggest question on Canadian consumers’ minds is, with inflation pushing 4.8%, how much longer will we need to live with an elevated cost of living? Unfortunately, shoppers can expect higher basket-of-goods prices for another six months, with inflation bumping up against a 5% ceiling as long as current supply-chain challenges persist. Once those pipelines normalize, the Bank expects a temporary lull in the 3% range, before gradually lowering back to 2%. “The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations to not become embedded in ongoing inflation,” it states.

Though that may be cold comfort for cash-strapped and pandemic-weary consumers. Calls have been growing increasingly louder for the BoC -- which has the main mandate of controlling the rate of inflation -- to take urgent action against the current trend. Various economists remain split on whether today’s move was the right one, according to Finder’s Bank of Canada Interest Rate Forecast Report.

READ: Inflation Just Hit a 30-Year High, So When Will the Bank of Canada Act?

According to the panel, Derek Holt, vice president and head of capital markets economics at Scotiabank, believes the Bank of Canada is “waayyyyy behind and driving rising macroeconomic imbalances in the process,” while Philip Cross, a senior fellow at Macdonald-Laurier Institute (MLI) agrees the Bank is “way behind on inflation.” 

However, the Bank’s approach aligns with the expectations of David Dodge, former BoC Governor, who told BNN Bloomberg prior to the announcement that “The bank is going to do what’s appropriate.”

“It’s quite appropriate for the bank to be raising rates, but not to raise them dramatically and dramatically quickly over time, or initially, but to aim to get back to what they would consider a neutral rate, which is something in and around two or 2.5 per cent over the next 12, 18 or 24 months,” he stated.

So… What Does This Mean for Mortgage Borrowers?

Variable mortgage borrowers (whose rates are market-facing and directly impacted by the direction of monetary policy) have a temporary reprieve this month, as consumer lenders have no impetus to materially tweak their pricing. They’ll feel the pressure soon enough, though, as the costs of taking out new debt and carrying existing loans are poised to become pricier in the short term. However, analysts expect mortgage holders will utilize the options available to them in order to make costlier debt more palatable.

"Rising rates means accessing credit gets more expensive,” says Sung Lee, RATESDOTCA expert and licensed mortgage agent. “Nonetheless, we expect the mortgage market to remain strong considering people will still need shelter, they will still want the best possible rate upon renewal and they will continue to refinance and pay down higher interest debt, since leveraging your home still provides the lowest cost of borrowing.”

Lee calculates that once rates do start to rise, a a homeowner carrying a $500,000 mortgage with a 25-year amortization would see their monthly payment jump $58 per month based on a 0.25% increase, while four quarter-point increases would escalate that payment by an additional $238/month, based on an eventual rate of 2.35%.

Fixed rate mortgage holders, who are locked into their rate for the remainder of their mortgage term, won’t be impacted by today’s current rate volatility -- but they can expect to contend with an overall higher rate environment once their term comes up for renewal, or if they wish to refinance. Government of Canada bond yields, which are used by consumer banks to set the cost of fixed-rate borrowing, have steadily been on the rise, up 122 basis points over the last year, with an increase of 30.5% in the last 30 days.

​​“There was a segment of homeowners with fixed-rate mortgages that moved to secure refinancing in late 2021 at low rates in anticipation of an upcoming increase," says expert and mortgage broker Leah Zlatkin. “While there was no change from the Bank of Canada today, it’s expected an increase will occur soon and fixed rates, which are not immediately impacted by the overnight rate, are already increasing. Homeowners should discuss their options with a broker before making a move this year.”  

The next Bank of Canada announcement is set for March 2, 2022.