Bank of Canada Holds Policy Rate, Cuts Growth Forecast


In a scheduled announcement on July 14, 2021, the Bank of Canada kept its target for the overnight lending rate at its effective lower bound of 0.25%. The Bank also adjusted its Quantitative Easing (QE) program lower to a target of up to $2 billion of Government of Canada bonds weekly to reflect “continued progress towards recovery and the Bank’s increased confidence in the strength of the Canadian economic outlook.”

The Bank said economic growth in Canada slowed in the second quarter as the third wave of the Coronavirus hit. Despite this, falling COVID-19 cases, progress on vaccinations, and easing containment restrictions all point towards a strong pickup in the second half of 2021. The Bank now expects Canadian GDP growth of around 6% in 2021—slightly lower than was expected in April’s Monetary Policy Report—but it has revised up its 2022 forecast to 4.5% and projects over 3% growth in 2023.

The Bank expects the Canadian economic recovery to be led by consumption as households return to more normal spending patterns. At the same time, it expects housing market activity to ease from record levels, which data shows is already well underway.

What’s next?

Looking ahead, the Governing Council judges “the Canadian economy still has considerable excess capacity, and that the recovery continues to require extraordinary monetary policy support.” It also stated it “remains committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved.”

In the Bank’s July projection, this happens sometime in the second half of 2022. The Bank also stated it will “continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.”

Mortgage rates

Effective June 1, 2021, the minimum qualifying rate for all mortgages is the greater of the mortgage contract rate +2% or 5.25% as set by the Office of Superintendent of Financial Institutions (OSFI) and the Department of Finance. All mortgage applicants must qualify for financing based on an interest rate no less than the benchmark five-year lending rate, even if the mortgage is for less than five years. 

Canada’s major chartered banks are currently advertising five-year fixed mortgage special interest rates of around 2.44%. Home buyers can often negotiate the interest rate for mortgage financing based on their creditworthiness and the degree to which they do other banking business with the mortgage lender. 

The Bank of Canada’s next scheduled interest rate announcement will be on September 8, 2021. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in its Monetary Policy Report on October 27, 2021.

Learn more about the impact to Canada’s housing markets on


Canadian Housing Market Showing Signs Of ‘Excess Exuberance,’ Bank Of Canada Warns

Tiff Macklem says he’s surprised by the strength of real estate.

OTTAWA ― Bank of Canada governor Tiff Macklem says the central bank is seeing early signs that people may be purchasing homes solely because they believe prices may go up.

Macklem says rising prices in particular for single-family homes are still a long way from the heated market the country observed about five years ago.

Fuelling the increase has been a combination of demand for more space as millions of workers do their jobs remotely, constrained supply and rock-bottom interest rates driven low by central bank actions.

The bank’s key policy rate has been at 0.25 per cent for about 11 months, and its quantitative easing program is trying to reduce the rates paid on things like mortgages to drive spending.

Macklem says the central bank is surprised by the rebound in the housing market.

He adds there are early signs of what he called “excess exuberance,” with people maybe expecting the recent increases in prices to go on indefinitely.

“What we get worried about is when we start to see extrapolated expectations, when we start to see people expecting the kind of unsustainable price increases we’ve seen recently go on indefinitely,” Macklem said during a question-and-answer session with chambers of commerce in Edmonton and Calgary.

“We are starting to see some early signs of excess exuberance, but we’re a long way from where we were in 2016-2017 when things were really hot.”

Macklem says there is still a need for considerable monetary policy support to generate a complete recovery.

In the meantime, the bank will keep an eye on debt levels, as mortgage debt rises as households pay down other debt like credit cards and personal loans, Macklem says.

“We are acutely aware that in a world of very low interest rates, there is a risk that housing prices could get stretched, households could get stretched, and certainly that’s a risk we want to guard against,” Macklem told reporters following the speech

Mortgage Deferrals ‘Buying Time’ For Canadians, Bank Of Canada Says

The pause in mortgage payments are giving people a chance to get back to work.

A view of Metro Vancouver is seen here at twilight on July 18, 2020, from Burnaby, B.C. Softening population growth from immigration could start to weaken house prices in the future.

TORONTO — A Bank of Canada economist says the current economic recovery could be different than the recovery from the financial crisis of 2008.

Mikael Khan, the Bank of Canada’s director of financial stability, said that while the employment rate has fallen due to the pandemic, house prices are recovering and keeping homeowners from filing for insolvency.

Khan said breaks from mortgage payments have bought homeowners some time to get back to work amid the COVID-19 pandemic and economic downturn.

“The fact that these deferrals have been available is really, really important,” said Khan. “Ultimately, what matters most when it comes to defaults is people having a job, having their incomes. What the deferrals are doing is they’re essentially buying time for that process to unfold.”

Khan, who spoke at the Move Smartly Toronto Real Estate Summit on Monday, has been studying mortgage defaults. He compared the COVID-19 pandemic to a natural disaster, such as the 2016 wildfires in Fort McMurray, Alta., which also involved a mortgage deferral recovery plan.

Bank of Canada research found that while the wildfires caused a bigger spike in employment insurance filings than the 2008 recession, the EI trend reversed much faster after the fires than in 2008.

The 2008 conditions set off a lengthy recession due to “an underlying fragility in the global financial system,” the research suggested. But the wildfires, like the COVID-19 pandemic, were a sudden shock.

“One thing that’s always very important when you’re facing a large negative shock is the initial conditions,” said Khan.

“In Fort McMurray, when the wildfires hit, that’s an area that had already been struggling for some time with the decline in oil prices that had occurred about a year or so prior, so financial stress was quite high,” Khan said.

“Now, at the national level, what we’ve been concerned about for many, many years is the high level of household debt. That’s the No. 1 pre-existing condition that was there when the pandemic struck.”

While there are some parallels, the rebuilding process from a pandemic remains more uncertain compared to a wildfire, the research said. Khan cited increased savings rates as an example of a fundamental shift with potential to affect how quickly the economy recovers from COVID-19.

Over the past few months, some have warned that it could lead to a deferral cliff once benefits —such as Canada Emergency Response Benefit and mortgage deferrals — run out.

“When it comes to bumpiness in the recovery … this question that has been in the background of most of our discussions is, ‘To what extent will we see defaults or insolvencies?’” said Khan. “I think it’s reasonable to expect some sort of increase. What we’d be concerned about, there, is a very large-scale increase.”

Khan said that when a mortgage is in default, it can be caused by a “dual trigger” of both unemployment and large decline in house prices. Home prices in many areas have recovered since the start of the pandemic, Khan said. The job market’s recovery will be key to determining the impact of mortgage deferrals, said Bank of Canada research cited by Khan.

Softening population growth from immigration could start to weaken house prices in the future. But for now, Khan said, it wouldn’t make sense for homeowners with healthy home equity to file for insolvency.

“Even in cases where a homeowner simply can’t make their mortgage payments anymore — as long as they have equity in their homes and the housing market is relatively stable — there’s always the option to simply sell without kind of resorting to those sorts of measures,” said Khan.

Mortgage Rate Forecast


  • COVID-19 sends interest rates plummeting
  • Canadian recession unavoidable
  • Bank of Canada cutting rates, but how low?

Mortgage Rate Outlook
The growing fears of the potential impact of COVID-19 resulted in a full market meltdown in late February, sending equity markets into free fall and global bond yields plummeting. On top of an already volatile situation, two of the world’s largest oil producers, Saudi Arabi and Russia, have engaged in a price war that sent oil prices to levels not seen since the late 1990s.

That panic sent Canadian bond yields down sharply and prompted emergency rate cutting by the Bank of Canada. Variable and 5-year fixed qualifying mortgage rates have followed bond yields lower with the 5-year fixed rate reaching 2.59 per cent, its lowest level since 2016 and very near its lowest level on record.

How prolonged and just how serious this outbreak will be is still unknown, which makes forecasting extremely difficult. What we do know is that the economy is in for at least a quarter of significant loss of economic output as measures to stop the spread of COVID-19, such as social distancing, sheltering in place and mandatory business closures, put a halt to economic and social activity.

Though mortgage rates have started rising as risk increases, we anticipate that measures implemented by the government, the Bank of Canada and other global central banks will help to calm fears over financial system liquidity and stem a longer-term spike in bank funding costs and mortgage rates will once again decline as the economy recovers.

Of note, the Canadian government has postponed changes to the mortgage stress test. The qualifying rate for insured mortgages was set to change from the 5-year posted mortgage rate to the average 5-year fixed rate plus 200 basis points on April 6, with the B-20 stress test for uninsured mortgages to follow suit. By postponing this change, the government has muted the passthrough from monetary policy to the housing market, particularly since the 5-year posted rate has maintained at 5.19 per cent, despite the average 5-year contract rate falling to near historical lows. The impact of dramatically lower rates will still help those renewing or refinancing mortgages at lower rates by freeing up monthly cash-flow due to lower mortgage payments.

Economic Outlook
Economic growth in Canada slowed sharply to end 2019, even before supply chain disruptions due to both COVID-19 and interrupted rail service. Those factors alone were expected to slow growth in the first half of the year and now the Canadian economy is also dealing with plummeting oil prices resulting from a price war between Saudi Arabia and Russia.

There is tremendous uncertainty around the economic outlook beyond the first half of 2020 and a viral outbreak is not something that macroeconomists can model. The measures needed to stem the spread of infections are at odds with robust economic activity, which means we will see a sharp decline in retail sales, tourism, and other activity in the coming months. Adding to that uncertainty is the dramatic drop in oil prices, which in the past has been enough on its own to turn Canadian GDP growth negative.

In model simulations, we estimate the combined impact of COVID-19 and the oil shock will tip the Canadian economy into a recession, including what may be a historic drop in output in the second quarter, followed by a robust recovery as activity returns to normal and the impact of the government’s fiscal stimulus kicks in.

Interest Rate Outlook
The Bank of Canada lowered its overnight rate by 100 basis points in the span of a week, an unprecedented action that is likely to be followed by subsequent rate reductions. With the economy facing a sudden stop in economic activity, most other considerations for the Bank are on the back burner and we expect the Bank to bring its overnight policy rate to 0.25 per cent.

In the past, when the Bank has aggressively lowered its policy rate, it has taken up to 24 months before there was a rate increase. If economic activity does post a strong recovery in the second half of 2020, we expect the Bank will maintain its policy rate at 0.25 per cent for the remainder of the year

BoC says the housing market is still vulnerable to household debt

Close up woman doing finance at home office with calculate expenses.

The Bank of Canada released its review of the financial system Thursday and warned that it was important to remain vigilant to the risk of household indebtedness.

The bank said that while the mortgage stress test and interest rate hikes have slowed household borrowing and improved credit quality, there are still high levels of indebtedness and a large portion is held by households that are highly indebted.