Central 1 Credit Union’s Chief Economist Forecasts Low Interest Rates To Continue

The chief economist of the trade association of B.C. and Ontario credit unions expects interest rates to remain low for some more time.

Bryan Yu with Central 1 Credit Union anticipates that the Bank of Canada will raise its interest-setting rate only toward the end of 2022.

Yu doesn’t see the bank “pulling the trigger too quickly”.

“Our view is that the bank is going to be more patient,” Yu told the Straight in a phone interview.

The low cost of borrowing has been one of the main drivers of the housing market in Canada—and B.C., in particular. The bank slashed its overnight rate three times in March 2020 to its lowest level of 0.25 percent.

The move was intended to contain a feared economic fallout in the face of the COVID-19 pandemic. Variable mortgage rates are influenced by the bank’s overnight rate.

Up until March 2021, the bank has maintained that it will hold the rate until 2023.

However, the institution indicated in April that a hike may be forthcoming earlier, in 2022, after certain economic targets are met in the second half of that year.

In July 2021, Central 1 released its interest-rate forecast, which predicted that the current rate of 0.25 percent will go up to 0.5 percent in the fourth quarter of 2022 and to 0.75 in the first quarter of 2023.

Yu said that the Bank of Canada will likely want to first see a stable economic recovery before hiking rates.

Meanwhile, yields on the five-year Government of Canada bonds are also expected to increase. This means an uptick in five-year fixed mortgages that constitute the most popular mortgage product in the country.

“We will see, I think, some modest movements in the five-year rates over the course of 2022,” Yu said.

Overall, the economist doesn’t expect rate increases that would shock the housing market.

“It’s still going to be a low-rate environment,” Yu said.

In a May 5, 2021, outlook report for the B.C. housing market, Yu wrote that higher mortgage rates would “quickly cool the market”.

However, a “sharp hike in rates is unlikely given ongoing economic uncertainties, excess economic slack and anchoring of the Bank of Canada’s policy rate at current levels for the coming year”.

In the interview, Yu noted that even a higher-than-anticipated increase in interest rates can be handled by borrowers.

“They have been stress-tested at a relatively higher rate than their actual contracted rate,” he said.

Yu was referring to tighter mortgage rules introduced by the federal Office of the Superintendent of Financial Institutions and the Department of Finance.

Starting June 1, 2021, insured as well as uninsured mortgage applications should qualify at either the benchmark rate of 5.25 percent or the rate offered by the lender plus two percent—whichever is higher.

The previous qualifying rate was 4.79 percent. The new rules are meant to ensure that borrowers can afford higher payments should financial circumstances change.

With the more stringent rules in place, Yu said, borrowers have a “lot of wiggle room” should interest rates increase more than expected.

Follow Carlito Pablo on Twitter @carlitopablo.

Credit to: The Georgia Straight