The Bank of Canada’s Rate Decision October 2023: Its Impact on Homeowners

October 30, 2023

In recent years, the Bank of Canada’s monetary policy decisions have been under the spotlight, especially for homeowners. The bank’s decisions directly influence the cost of borrowing, whether through variable or fixed-rate mortgages. A recent announcement from the Bank of Canada, where it chose to maintain its overnight rate at 5 percent, provides valuable insight into the country’s economic future. In this comprehensive blog post, we’ll delve deeper into the implications of this decision and why it’s of paramount importance to homeowners.

The Bank of Canada’s decision to hold the overnight rate at 5 percent is reflective of the prevailing economic conditions in the country. In their accompanying statement, the Bank acknowledged that higher interest rates are beginning to exert a dampening effect on economic activity. Notably, this indicates that the Bank foresees the continuation of relatively weak economic growth through 2024.

A focal point in the Bank of Canada’s statement is the issue of inflation. The Bank has been closely monitoring inflation trends and noted that there is little downward momentum in its preferred measures of core inflation. Furthermore, the Bank anticipates that inflation will average around 3.5 percent until the middle of the next year before gradually declining to reach its 2 percent target by 2025. What’s of particular significance is that the Bank expressed concerns about the stability of prices and highlighted the increased inflationary risks in the near future, signaling its readiness to further raise the policy rate if needed.


The Impact on Homeowners

Now, let’s delve into why these economic developments matter to homeowners and how they might be affected:

  1. Variable Mortgage Rates: For homeowners with variable mortgage rates, the decision to maintain the overnight rate at 5 percent suggests that interest rates are unlikely to decrease in the near future. If inflation remains high and the Bank of Canada’s concerns persist, homeowners may have to continue dealing with elevated borrowing costs. The prospect of further rate increases could pose challenges for budgeting and managing mortgage payments, making it vital for homeowners to be prepared for such scenarios.
  2. Fixed Mortgage Rates: On the other hand, homeowners with fixed-rate mortgages have already experienced a significant uptick in their borrowing costs, with fixed mortgage rates hitting annual highs of over 6 percent. This increase, coupled with an increasingly stringent stress test for new buyers, has made it more challenging for potential homeowners to enter the real estate market. However, there’s a glimmer of hope on the horizon. Yields on five-year Government of Canada bonds have begun to come down from their recent highs, offering some respite to borrowers. This decline in bond yields could potentially lead to more favorable fixed mortgage rates, albeit in the future.

Looking Ahead

What can homeowners anticipate in the coming months and years? Here are some key considerations:

  1. Rate Cuts and Their Impact: It’s expected that five-year fixed mortgage rates may begin to decrease in early 2024 as bond markets price in potential future rate cuts by the Bank of Canada. This development might offer a sigh of relief to homeowners carrying fixed-rate mortgages. However, even with these anticipated cuts, it’s essential for homeowners to keep in mind that rates are unlikely to return to the historically low levels seen in the past decade.
  2. Inflation and Economic Uncertainty: The Bank of Canada has been unequivocal about its intentions regarding interest rates: they are ready to raise rates further if inflation remains a concern. As a result, homeowners should be prepared for a future where borrowing costs remain relatively higher than what they’ve become accustomed to in recent years. Moreover, the ongoing economic uncertainty, particularly with the Bank’s observation of weak economic growth through 2024, emphasizes the importance of homeowners being prudent in managing their finances and preparing for potential financial challenges.

The Bank of Canada’s decision to maintain the overnight rate at 5 percent carries significant implications for homeowners. It underlines the importance of staying informed about economic developments and being prepared for a future with potentially higher borrowing costs. Homeowners should carefully assess their financial plans, consider various scenarios, and be ready to adapt to a changing economic landscape. In the coming years, a proactive and informed approach to personal finance and mortgage management will be more critical than ever.