The Bank of Canada's 'conditional pause' on interest rates may be over — so brace for another hike soon

There could be bad news for anyone with a mortgage this week, as speculation is growing that the Bank of Canada is getting ready to start raising lending rates again.

After hiking its benchmark interest rate repeatedly in a bid to rein in runaway inflation, the central bank hit pause on hikes in January, saying it needed time to gauge the impact on the economy.

That pause, though a strong indication the bank hoped the battle had been won, was anything but certain, as central bank governor Tiff Macklem made clear in a speech soon after the decision.

"This pause is conditional," he said. "It depends on whether the economy develops as we think it will and whether inflation continues to fall."

Since then, a number of data points have come out suggesting that those conditions are no longer being met, as Canada's economy is still running hotter than the central bank would like — perhaps even by enough to compel Macklem to step off the sidelines once again.

Canada's economy expanded at a 3.1 per cent annual pace in the first quarter, Statistics Canada said last week. That's far more than what the central bank was forecasting when it took its foot off the brake. 

That stronger than expected GDP number came on the heels of inflation data for March that showed the country's inflation rate inched up in April to 4.4 per cent. That was a reversal after nine straight monthly declines.

Stronger than expected output and an inflation suddenly trending in the wrong direction would ordinarily be the sort of thing that might compel a central bank to step in and cool things down.

Investors certainly seem to think there's a chance. Trading in investments known as swaps, which bet on future central bank rates, imply there's about a 40 per cent chance of a small hike in the central bank's rate on Wednesday, taking it to 4.75 per cent.

That's bad news for anyone with a mortgage, as lending rates that have also soared this year will be poised to go even higher.

Ron Butler, a Toronto-based mortgage broker, says variable rate mortgages have borne the brunt of the damage from rate hikes so far, and if the central bank decides more are needed, the impact would be dramatic and immediate.

"In many ways, for the people with variable rates it could … be the last straw and force them to have to take really drastic action," he said in an interview.

Despite the dramatic rise in lending rates so far, only a small percentage of borrowers have actually felt their payments increase, since fixed rate borrowers tend to lock in for several years at a time, and even most variable rate loans have fixed payments that simply add years to the loan instead of increasing the payment when rates rise.

Regardless of what the central bank does this week, the market has moved into a new normal of higher rates, and it's a slow moving wave that will keep hitting people as they renew or buy for years to come.