The Bank of Canada has paused rate hikes. What does this mean?

Back in January, the Bank of Canada announced its eighth consecutive interest rate hike. This was followed by an intriguing message that it may begin a conditional pause on rate increases. What does this mean, and what do paused rate hikes depend on? There are a couple factors that will influence the state of interest rates moving forward. Here’s a quick overview of what you should know ahead of the central bank’s future decisions.

What is a “conditional pause?”

The term “conditional pause” means the Bank of Canada is stopping rate hikes as long as the economy meets certain criteria. Inflation, employment, and even trends in the United States are factors that impact interest rates. When those factors overall move in the right direction, the bank will keep rates steady. We saw this come true in March, when the bank decided not to increase the overnight rate for the first time in over a year. The overnight lending rate is currently 4.5 per cent, its highest point in many years. 

The fact that the Bank of Canada has paused rate hikes comes as a relief to all Canadians. It tells us inflation is declining, and for home owners, variable mortgage payments should stop climbing. However, since this pause is conditional, it means we aren’t entirely out of the woods. Below, let’s review what to watch out for as we move through the rest of the year.

What could cause further rate hikes?

As we briefly mentioned above, inflation, employment, and U.S. trends are all important factors that help determine interest rates here in Canada. Inflation is the big one here, and this is what has been driving rate hikes for the past year. Our economy had been running on record-high inflation numbers, hitting its peak at 8.1 per cent in June 2022. The higher inflation is, the higher interest rates will be to help slow down the economy. Our current inflation rate sits at 5.9 per cent, which was low enough for the Bank of Canada to pause rate hikes. However, if we start seeing accelerated GDP growth or excessive employment as a result of inflation, that’s when the bank might introduce more rate hikes.

Canada and the U.S. are closely linked, and our interest rates somewhat depend on what’s going on with our southern neighbour. Inflation and rate increases in the U.S. can weaken the value of our Canadian loonie in comparison to the U.S. dollar. If rate hikes down south impact our dollar and reignite inflation, the risk of rate hikes in Canada grows. Right now, the U.S. is dealing with high levels of inflation, so this is something to watch throughout 2023.

Do you need to worry?

At the end of the day, should you be concerned about more rate hikes coming your way? It’s impossible to be certain, but we know it will depend heavily on inflation both here in Canada and in the U.S. Overall, it seems the Bank of Canada is satisfied with current trends, and if things continue in this direction, we might not see more rate hikes this year. However, we also will not likely experience significant rate decreases in the near future. Even if inflation continues to lower, the bank feels we need further progress before rate drops are on the table.

The good news in all of this is that for the time being, we are moving in the right direction. If you’re a home owner, you know you can also reach out to a mortgage broker like us! Interest rates can be confusing, and if you need some extra guidance, we are always here to help.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.