Low interest rate environment may continue

According to the chief economist of the trade association of B.C. and Ontario credit unions, interest rates will be low for a longer period of time.

Bryan Yu from Central 1 Credit Union expects the central bank to start raising its key lending rate only at the end of the next year.

He doesn’t think the Bank of Canada will begin to act too fast.

The low borrowing cost is one of the strongest drivers of the real estate market in Canada, especially in case of British Columbia. As you know, the BoC reduced its overnight rate three times in March 2020 to the lowest mark of 0.25%.

It was meant to restrain a potential economic slowdown amid the COVID-19 pandemic. The Bank’s lending rate affects variable mortgage rates.

Before March 2021, the central bank has promised to keep the rate unchanged until 2023.

Nevertheless, in April, the BoC said a rate increase could happen in 2022, as soon as we reach certain economic goals at the second half of it.

Last month, Central 1 released its interest-rate forecast, expecting today’s rate of 0.25% to rise to 0.5% in the fourth quarter of the next year and to 0.75% in the first quarter of 2023.

According to Yu, before raising the rate, the Bank will have to wait for a strong economic rebound.

At the same time, yields on the five-year Government of Canada bonds are also expected to go up, meaning higher five-year fixed mortgage rates, which are the most popular in the country.

“In my opinion, we’ll see some moderate changes in the five-year rates during the next year,” – Yu added.

He doesn’t predict any significant rate changes which could shock the market.

“We’ll still have a low-rate environment,” – Yu said.

In his May outlook for the B.C. real estate market, Yu wrote that higher interest rates could cool down the market quickly.

Nevertheless, a “significant rate increase will hardly happen with today’s economic uncertainties, excess economic slack and the BoC’s current lending rate for the next year”.

In Yu’s opinion, borrowers will cope with even a higher-than-expected rate hike, as “they have been stress-tested at a relatively higher rate than their contract one,” – he explained.

With the current stricter rules, Yu believes that borrowers have a necessary cushion to withstand even a larger rate increase than we are predicting.