In a move that was widely anticipated, the Bank of Canada has decided to maintain its benchmark interest rate at five percent. This decision marks the second consecutive time that the central bank has chosen to keep rates unchanged. It's a signal that the Bank might be shifting to the sidelines after a series of rate hikes over the past year.

These rate hikes were introduced to combat soaring inflation, which reached its highest level in 40 years. The Bank raised interest rates ten times in response, taking the cost of borrowing from virtually zero percent to the current five percent. This aggressive approach was successful in taming inflation, reducing it from 8.1 percent in the summer of 2022 to 3.8 percent last month.

Bank of Canada's Inflation Concerns

The Bank acknowledges that inflation appears to be moving in the right direction. However, it remains cautious, emphasizing that the inflationary pressures have not been entirely eliminated. The Bank's statement highlights the effects of past interest rate hikes on economic activity and price pressures. It notes subdued consumption, reduced demand for housing, durable goods, and services.

The Bank's economic projection suggests that the cooling of the economy will gradually bring inflation back to its two percent target by sometime in 2025. While the Bank has left the door slightly ajar for further rate hikes, it has stated its commitment to maintaining price stability.

However, investors appear to be betting against further rate hikes. Trading in investments, such as swaps, suggests a minimal chance of a rate hike at the Bank's next policy meeting in December. Market pricing even indicates expectations for a lower rate next spring than the current rate.

Expert Opinions on the Future of Rates

Economists and market experts share various opinions on the Bank's next move. Some believe that the Bank is done with rate hikes but is cautious about announcing it publicly, as it might lead to misconceptions about potential rate cuts. This is because suggesting rate cuts could prompt people to inflate the housing market and increase spending, potentially reigniting inflation.

Carrie Freestone, an economist with RBC, shares a similar view, suggesting that the Bank is unlikely to explicitly state that rates will remain unchanged for an extended period due to growing upside risks to inflation.

Impact on Homeowners

For homeowners facing mortgage renewals, these uncertainties have real consequences. As rates have risen significantly over the past year, many find themselves adapting to higher costs than anticipated. The Spanik family, for example, renewed their mortgage this year, opting for a fixed rate to ensure payment predictability. While they gained peace of mind, it came with an additional cost of $1,200 compared to their previous payments.

Many other families are in a similar position, adjusting to rates that are higher than initially expected. Mortgage professionals have also voiced their concerns, as statements by the central bank regarding prolonged low rates influenced decisions made by both mortgage professionals and Canadians.