Last year the Canadian economy recorded its largest-ever annual GDP drop of 5.1%, but it is now also on track to post a comeback in Q4, which could force the Bank of Canada to rein in inflation sooner than originally expected.
Scotiabank economist Derek Holt says that it carries potentially strong policy implications for the Bank of Canada as it is currently looking like it has over-committed itself to keeping rates on hold until 2023. While GDP data isn’t out for December yet, the fourth quarter is on track to post a gain of 7.8%, according to estimates.
Derek Holt added said that based on preliminary Q4 data, the first quarter now has roughly 1.7% annualized GDP “baked” into it. This is in contrast to the 2.5% contraction forecast by the Bank of Canada in its January Monetary Policy Report.
Additionally, some have been saying that due to the federal government’s talk of up to $100 billion in new stimulus spending over the next three years that it could contribute to over-stimulating demand in the market.
This potentially translates into a need to raise interest rates earlier than the original 2023 timeframe that has the Bank of Canada has been saying for the most recent months.
“If Canada’s economy outperformed expectations without vaccines, then just imagine how it might perform as herd immunity approaches by fall and what that may come to mean for monetary policy,” Derek Holt said.
Since the current trends are showing inflation at around 1.6–1.7% which is just a smidge below the 2% target, the Bank of Canada is much closer to their target OR even above it much sooner than expected.
Holt’s advice to those who are heavily indebted is to plan their finances on the basis of the Bank of Canada could start to hike rates “considerably sooner” than 2023.
What does this all mean for you, well if you are considering getting a variable mortgage based solely on the slightly lower rate, well if the bank of Canada raises its interest rate once, that edge may disappear.
For that reason, many have already been choosing the security of today’s historically low fixed rates, but they could soon start to rise as the first few signs of economic recovery is beginning to take hold.
This may already be happening as some lenders have explained that for the past three weeks there has been more upward movement in the bond markets and this is putting pressure on interest rates. As a result the 5, 7 and 10-year rates could potentially be moving up.
If you need a partner that can guide you through this process, please give me a call anytime at 604-202-9913. I am happy to work together with you and find the best mortgage solution for you.