To rise, or not to rise. That’s the Bank of Canada’s key question for 2022.
Last Wednesday, January 26, the Bank of Canada decided not to raise the benchmark interest rate, keeping it at its historical low of 0.25%.
Instead, the Bank of Canada decided to postpone that decision for their next meeting, or as Governor of the Bank of Canada Tm Macklem put it, to put interest rates on a “rising path.”
What does a “rising path” mean?
Tim Macklem wasn’t exactly specific. But what he seemed to be implying was that the Bank of Canada will raise the interest rate in increments over the year.
The question, however, is just how fast will they hike interest rates? At first, it seemed as if the Bank of Canada would gradually raise rates over the year. But now I’m not so certain that’s the case. It seems like the Bank of Canada could raise rates drastically over their next scheduled meetings.
“I think the message is pretty clear,” he said, “we’re on a rising path. How far and how fast, those are decisions we will take at each meeting.”
As for the rest of January—and possibly February—the path forward won’t be rising but relatively flat. The Bank of Canada has no scheduled dates to announce interest rate changes until March 2, meaning interest rates could stay low until that day. For 2022, the scheduled dates for interest rate announcements are:
- March 2
- April 13
- June 1
- July 13
- September 7
- October 26
- December 7
Should you lock-in historically low rates now?
Most of Canada’s top banks have warned homebuyers now is not the best time to buy a house. Let that sink in for a second. The people who are making money off your decision to buy a home are telling you not to do it.
For one, home prices are exorbitantly high. The average price of a home in Canada is around $720,860, which requires a higher down payment ($47,036) than the average Canadian can afford. In hot markets, such as Toronto and Vancouver, the price is even higher.
Unless you’re financially prepared for such a massive purchase, you’re likely going to stretch your budget too thin.
The Bank of Canada has also warned homebuyers against extrapolative expectations. In a nutshell, that means homebuyers shouldn’t expect home prices to rise simply because they’ve been on an upward path. Past performance does not necessarily guarantee future performance.
Though prices will likely go up this year, it’s not guaranteed that they will grow at the same rate they did last year. In fact, research suggests that the rate at which prices are growing will no longer accelerate in 2022 but rather decelerate: prices may climb, but they’ll climb at a slower rate.
If you absolutely must buy this year, you could lock in historically low interest rates by getting a mortgage pre-approval. While you’re not guaranteed a mortgage with an approval, you are guaranteed the interest rate, at least for a time, usually anywhere from two to four months.
