Bank of Canada Rate Outlook: Will Your Mortgage Payments Go Up?

The Key Impact: You might see your borrowing costs increase later this year if financial markets are correct. However, top economists believe the Bank of Canada will keep interest rates steady to support the fragile economy.

There is a big disagreement right now between Wall Street traders and Canadian economists. Traders are betting money that interest rates will go up this summer. But economists say the Canadian economy is too weak for that to happen.

Here is what you need to know about your money.

What is happening?

Financial markets are currently betting that the Bank of Canada will start raising interest rates starting in July.

Traders are pricing in two or three increases by the end of the year. This prediction is driven by rising oil prices and fears of global inflation. These factors have pushed up bond yields, which often signals higher rates ahead.

If these hikes happen, it will become more expensive to borrow money.

Why economists disagree

Many Bay Street economists think these market predictions are "detached from reality." They believe the Bank of Canada will keep rates steady for now.

Here is why they are urging caution:

• Weak Growth: The Canadian economy is not growing very fast.
• Unemployment: The unemployment rate is going up.
• Trade Uncertainty: There are ongoing trade issues with the United States.

Bank of Canada Governor Tiff Macklem recently said the bank is in "no hurry" to raise rates. He indicated they will look past temporary spikes in oil prices.

The current policy rate sits at 2.25%. The central bank wants to keep it there to help the economy recover.

Who is affected?

This debate affects two main groups of people:

1. Variable-rate holders: If you have a variable-rate mortgage, a Home Equity Line of Credit (HELOC), or a variable-rate loan, your payments are tied directly to the prime rate. If the Bank of Canada raises rates, your monthly payments go up immediately.
2. Fixed-rate holders: If you are looking to renew a fixed-rate mortgage or take out a new loan, higher rates mean you will be offered a higher interest rate than what is available today.

What you should do

You cannot control the Bank of Canada, but you can control your budget.

1. Run the numbers: Use a mortgage calculator to see what a 0.25% or 0.50% rate increase would do to your monthly payments. Make sure you could still afford your home if rates rise.
2. Review your budget: Look for areas where you can cut spending. Building a small emergency fund now can help if payments go up later.
3. Don't panic: Remember that the experts (the economists) believe rates will stay low for a while. The market predictions are just bets, not guarantees.
4. Check your renewal date: If your fixed-rate mortgage is coming up for renewal soon, keep an eye on the news.

The Bottom Line

Financial markets are betting on rate hikes starting in July, but the economic data suggests the Bank of Canada will hold steady at 2.25% for the foreseeable future.

While you should be prepared for higher costs in the future, there is no need to panic yet. The central bank seems committed to supporting the economy rather than raising rates quickly.