Is there a chance mortgage rates will start rising earlier than anticipated?

Although the Canadian economy showed the largest annual GDP decline by 5.1% in 2020, the fourth quarter may still report a return to strong recovery. This could make the central bank start acting earlier than expected.

“Such a possibility brings a potentially strong policy influence on the Bank of Canada which is starting to wonder if it has over-committed itself to keeping rates unchanged until 2023,” – says Scotiabank economist Derek Holt.

While we don’t have the official data on GDP for December yet, preliminary estimates show a possibility of a 7.8% increase.

In addition to it, Holt says the first quarter may show a 1.7% annual GDP gain. Meanwhile, the BoC has predicted a 2.5% decline in January.

Another thing to remember is that some say the federal government’s intentions to provide up to $100 billion in new stimulus spending during the next three years may lead to excessive demand.

“The main risk is that the proposed $70-100 billion in stimulus funds will outlive their need, at least when it comes to pushing demand after 2021,” – noted CIBC economist Avery Shenfeld.

As a result, there could be a strong need to raise interest rates earlier than in 2023, although the Bank has been pointing to this exact period.

“If Canada’s economy exceeded forecasts without vaccines, then just imagine how it may perform when the vaccines are distributed massively by fall, and how it could affect the monetary policy,” – Holt says.

He believes those who have large debts should plan their finances based on a possibility that the central bank will start raising rates considerably earlier than in 2023.

“If the economic weakness is eliminated next year and inflation gets closer to the target level, the Bank will have no reasons to keep its current stimulus volume,” – he added.

It means new homebuyers who have been thinking about getting a variable mortgage may take a pause. As today’s variable rates are lower than the fixed ones by only 0.10-0.20%, only one rate increase by the BoC will erase this advantage.

That’s why many buyers already choose the security of extremely low fixed rates. However, they can also start growing once we see the first signs of recovery gaining the desirable pace.