Variable-rate mortgage borrowers who have seen their rates skyrocket over the past year and a half received a reprieve today as the Bank of Canada announced a rate hold.

 That leaves the bank’s overnight target rate at 5.00% and prime rate, upon which variable mortgages and lines of credit are priced, at a 22-year high of 7.20%.

In its statement, the Bank said it decided to pause rates due to “recent evidence that excess demand in the economy is easing and given the lagged effects of monetary policy.”

The move was fully expected by markets, particularly after last week’s release of weaker-than-expected GDP data from June and the second quarter. Statistics Canada reported on Friday that real GDP fell 0.2% in the quarter, while also revising down Q1 growth by a full percentage point to 4.7%.

Sticky inflation keeps potential for additional rate hikes on the table

The Bank of Canada added that it “remains concerned about the persistence of underlying inflationary pressures and is prepared to increase the policy interest rate further if needed.”

Despite falling from a high of 8.1% in June 2022 to 2.8% this past June, CPI inflation was back again on the rise in July, climbing to 3.3%. The bank said it expects inflation to rise higher still in the near term due to elevated gas prices before easing again.

The “stickiness” of that inflation data will determine whether further rate hikes are warranted, but barring any major surprises, most economists believe July’s rate hike was likely the last.

“The Bank has certainly left the door ajar to the possibility of more hikes, but unless growth rebounds in Q3—which we doubt—the BoC is likely done with rate hikes,” wrote BMO’s chief economist Douglas Porter.

“The softer growth backdrop will bring inflation back to 2% over time in our view and in the BoC's models, even if the short-term CPI outlook is much more problematic,” he added.

Economists from National Bank agree but concede there remains a high degree of uncertainty in the near term.

“Markets are still in the 'will they, won't they' camp, with pricing for another hike around 50%. Given that the slowdown looks to continue, we think the bar for another hike has been raised,” they wrote in a research note. “That said, we’ll concede that the very near-term inflation outlook isn’t very comforting, and the Bank is undoubtedly going to remain on the defensive.”

Welcome news for variable-rate borrowers

Future rate moves aside, today’s pause to the latest round of rate hikes was welcome news for variable-ate borrowers, who have seen their rates surge 475 basis points, or 4.75 percentage points, since March 2022.

Ben Rabidoux, founder of Edge Realty Analytics, noted that mortgage rate increases since early 2022 have eroded housing affordability, which he said should keep housing demand constrained until at least early 2024.

Since March, the monthly payment needed to service the mortgage on a typical Canadian home has risen 15%, or $400, he noted.

The Bank’s next announcement will take place October 25.