The Canadian economy has proven resilient in the face of the Omicron variant of COVID-19, and it is all but assuring that the Bank of Canada will hike its overnight interest rate tomorrow.
Economic growth last quarter was robust, and while there were fears nationwide Omicron-induced lockdowns would stunt growth in January, that wasn’t the case. Canada’s output grew by an annualized 6.7% during the fourth quarter, building on a robust Q3 that saw 5.5% growth, according to Statistics Canada. The gains returned Canada to pre-pandemic economic growth -- economists predicted 6.5% Q4 growth, for example.
Economic output was sideways in December, but it was followed by a 0.2% increase at the beginning of 2022. There appears to be no shortage of pent-up consumer demand to further widen Canada’s recent economic expansion.
After major flooding in BC, Canada appears to have weathered another major tailwind last month when the Freedom Convoy rolled into Ottawa, and now instability in Ukraine following Russia’s invasion will be something to keep an eye on.
But the latter shouldn’t affect the Bank of Canada’s interest rate announcement tomorrow morning. Output in the fourth quarter surpassed the central bank’s estimate of 5.8%, and the bank has already stated that the economy is already up against its capacity limits.
In fact, Canadians are already bracing for an interest rate hike, says Sung Lee, a mortgage agent and expert with RATESDOTCA.
“A surge of pre-approval requests to lock in rates, increased uncertainty amongst clients on whether to choose fixed or variable, and a renewed interest in terms beyond the ever-popular five-year. We’ve seen a slight uptick in 10-year term inquiries, which have historically represented only 10% of mortgages in Canada,” Lee said. “With the prospect of multiple rate hikes over the next couple of years, some clients are willing to pay a premium for that longer-term certainty.”
Variable rates have been popular in Canada’s years-long low interest rate environment, and bond yields, which affect fixed-rate mortgages, have returned to pre-COVID-19 levels, meaning that lenders are now offering pacts in the 2.69-3.09% range. Conversely, most five-year variable-rate mortgages can be secured for 1.2 -1.5%.
If tomorrow’s anticipated rate hike does indeed come to fruition, expect a 25 basis point increase.