No Rate Hike Until March–BoC Assures Inflation Will Return To 2% over 2023-24.

Bank Will Hike Rates At Next Meeting

While markets were 70% certain the Bank would hike their overnight target rate today, we remained of the view that the Governing Council would hold off until March or April because of the slowdown in first-quarter growth arising from the Omicron restrictions. The Bank announced today that economic slack in the economy had been absorbed more rapidly than expected in late October when they last met. “Employment is above pre-pandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up. Unevenness across sectors remains, the Governing Council judges the economy is now operating close to its full capacity.”

Consequently, the Bank now believes that emergency measures arising from the pandemic are no longer necessary. They clearly state that a rising path for interest rates will be required to moderate domestic spending growth and bring inflation back to target. Being mindful that the increasing spread of Omicron will dampen spending in the first quarter, they decided to keep the policy rate unchanged today and to signal that rates will rise going forward. “The timing and pace of those increases will be guided by the Bank’s commitment to achieving the 2% inflation target.”

Notably, the Bank also suggested that another vital policy measure to reduce demand and thereby control inflation is “quantitative tightening” (Q.T.), reducing the central bank’s holdings of Canadian government bonds on its balance sheet. This selling of bonds also raises interest rates. “The Bank will keep the holdings of Government of Canada bonds on our balance sheet roughly constant at least until we begin to raise the policy interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to roll off. As we have done in the past, before implementing changes to our balance sheet management, we will provide more information on our plans.”

The Bank of Canada is very concerned about maintaining its hard-won inflation-fighting credibility. Remember that while Canadian inflation is at a 30-year high–as it is in the rest of the world–at 4.8%, Canadian inflation pales compared to the 7.0% rate in the U.S. and 6.8% rate in the U.K. (see chart below). It is also below the pace of the Euro area. The Bank stated that “CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.”

Written by :

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Your Credit Rating: The Four C’s.

Buying your first home is an incredible step in life, but it is not without its hurdles! One of which is demonstrating that you are creditworthy, which all comes down to your credit rating. This is how lenders and credit agencies determine the interest rate you pay, or whether you will qualify for a mortgage at all.

As mortgage rules continue to change, the credit rating is becoming even more important as a higher credit rating could mean a lower interest rate and save you thousands of dollars over the life of your mortgage.

If you’ve never given much thought to your credit rating before, don’t worry! It is not too late and we are going to take through everything you need to know. The most important of which is that, in order to qualify for a home, you must have a credit rating of at least 680 for one borrower.

There are several attributes that factor into your credit score, and these are commonly referred to as the “Four C’s” and consist of: Character, Capacity, Capital and Collateral. Let’s take a closer look at each:

character

The character component of your credit score is essentially based on YOU and your personal habits, which comes down to whether or not it is in your nature to pay debts on time. Some of the components that make up this portion of your credit score viability, include:

• Whether you habitually pay your bills on time
• Whether you have any delinquent accounts
• How you use your available credit:
  • Quick Tip – Using all or most of your available credit is not advised. It is better to increase your credit limit versus utilizing more than 70% of what is available each month. For instance, if you have a limit of $1000 on your credit card, you should never go over $700.
  • If you need to increase your score faster, a good place to start is using less than 30% of your credit limit.
  • If you need to use more, pay off your credit cards early so you do not go above 30% of your credit limit.
• Your total outstanding debt

capacity

The second component relating to your credit rating is your capacity. This refers to your ability to pay back the loan and factors in your cash flow versus your debt outstanding, as well as your employment history.

• How long have you been with your current employer?
• If you are self-employed, for how long?

Don’t be confused as capacity is not what YOU think you can afford; it is what the LENDER thinks you can afford depending on the debt service ratio. This ratio is used by lenders to take your total monthly debt payments divided by your gross monthly income to determine whether or not you are able to pay back the loan.

capital

Capital is the amount of money that a borrower puts towards a potential loan. In the case of mortgages, the starting capital is your down payment. A larger contribution often results in better rates and, in some cases, better mortgage terms. For instance, a mortgage with a down payment of 20% does not require default insurance, which is an added cost.

When considering this component, it is a good idea to look at how much you have saved and where your down payment funds will be coming from. Is it a savings account? RRSPs? Or maybe it is a gift from an immediate family member.

collateral

Collateral is something that is pledged against a loan for security of repayment. In the case of auto loans, the loan is typically secured by the vehicle itself as the vehicle would be repossessed and re-sold in the event that the loan is defaulted on. In the case of mortgages, lenders typically consider the value of the property you are purchasing and other assets. They want to see a positive net worth; a negative net worth may result in being denied for a mortgage.

Overall, loans with collateral backing are typically more secure and generally result in lower interest rates and better terms.

There is no better time than now to recognize the importance of your credit score and check if you are on track with the Four C’s and your debt habits. A misstep in any one of these areas could be detrimental to your efforts of getting a mortgage.

If you are not sure or want more information, reach out to a Dominion Lending Centres Mortgage Professional for a FREE review!

Written by our DCL Marketing Team