At its final rate decision meeting of the year, the Bank of Canada left its key interest rate unchanged.

The overnight target rate remains at 0.25% heading into 2022, a level it’s been at since March 2020.

Variable-rate mortgage holders have been keenly watching this rate and expectations for it going forward, since their mortgage rates are based on prime rate, which takes its lead from the Bank of Canada’s target rate.

The Bank of Canada is widely expected to start hiking rates next year, but there’s still some question surrounding the exact timing of the first move and the pace of subsequent increases in the coming years.

Based on the Bank’s statement this week, it doesn’t expect to start raising rates until the “middle quarters” of 2022, meaning April at the earliest.

While the Bank acknowledged the economy has had “considerable momentum” into the fourth quarter following 5.2% GDP growth in the third quarter, it added that “the economy continues to require considerable monetary policy support.”

The Market View

Market forecasts, however, suggest the first rate hike will come in March, which will be the Bank’s second rate decision of the year as there’s no meeting scheduled for February.

“…we are maintaining our call that the Bank will implement its first rate hike in March 2022 (assuming the Omicron variant isn’t as disruptive as some fear),” economists from National Bank of Canada wrote. “If that is the case, we might see the Bank tee it up at its January meeting in seven weeks time. By then, we will have greater clarity on the COVID situation and will have gotten a litany of other data/information.”

Forecasts from the Big 6 banks suggest two to four quarter-point rate hikes in 2022, while bond markets are pricing in five hikes, while would bring the Bank of Canada’s target rate to 1.50% by the end of next year.

Increased Rate Sensitivity Could Limit Hikes

But some say the Bank of Canada will be limited in how quickly and how high it can take rates, given elevated debt loads. Average mortgage balances are now over $360,000, up 18% compared to last year, according to data from Equifax Canada.

Not only that, but a larger percentage of borrowers have opted for variable mortgage rates over fixed, making them more sensitive to near-term rate hikes.

“We think the central bank will avoid raising its policy rate too quickly out of fear of triggering an abrupt landing of the housing market,” the NBC economists noted.

As of August, “a record 54% of new mortgage loans granted by banks (new purchases, renewals and refinancing) were at variable rates (vs. 11% in 2019), suggesting that under current conditions, the housing market is especially sensitive to a rise of the policy rate,” they added.

While variable-rate holders will face a greater impact from rising rates in the near term—unless they lock into a fixed rate early on—higher rates will also start to impact fixed-rate borrowers over the longer term when their mortgages come up for renewal.

“Consumers who took advantage of very low rates over the last 18 months on high-value mortgages may feel pressure at the end of their term when they have to renew their mortgage at a much higher rate,” noted Rebecca Oakes, AVP of Advanced Analytics at Equifax Canada.

For these reasons, some investors are already predicting that the Bank of Canada will have to lower rates following its initial hikes, potentially before the end of 2025. But that’s a long way out and a great deal can happen before then that could change those expectations.

In the meantime, borrowers should focus on the here and now and make their borrowing decisions based on their current financial situation and comfort level. For help with this, contact your broker to discuss your options.