Mortgage Rates & Mortgage Broker News in Canada

Rate Estimates Get Chopped

We find rate predictions more fun than astrology (and almost as accurate).

For those who give weight to economists’ rate models, the past month has been intriguing. Our dismal scientist friends seem to be getting ever more pessimistic.

Economists’ 2013 prime rate prognostication, for example, is now 1/2 point lower than it was a little over a month ago.

A 180 Degree Change in Rate Views

46% probability of a rate cut Sept. 7.

100% probability of a rate cut by year-end.

That’s what prices of closely-followed overnight index swaps (OIS) were implying at the close of business on Monday. OIS trade on market expectations for Bank of Canada rate moves.

That amounts to a 180 degree swing in market psychology. Just a few weeks ago traders were pricing in a rate hike by January.

Canadian Mortgage Rate Forecast

Over the past few months, major economists have backpeddled on their rate hike predictions.

Not long ago, the consensus of economists was projecting a July 19 increase. Now, those same analysts aren't looking for a rate bump until this fall...or later.

Here's a chart from BMO illustrating how fast rate hike expectations have waned.

A slew of factors justify a deferral of rate increases, including:

Bank of Canada Leaves Key Rate Unchanged

As was widely predicted, the Bank of Canada left its key lending rate unchanged at 1.00% for the sixth consecutive meeting.

A survey of 22 economists conducted by Bloomberg News prior to the rate decision found them unanimous in predicting this status quo.

The holding pattern on rates has been welcome news for variable-rate mortgage holders, with the prime rate remaining at 3.00% since September.

Why Interest Rates May Rise Slowly: Tal

Benjamin Tal is one of Canada’s most quoted domestic economists. In speaking to an audience at Dominion Lending Centre's National Conference, Tal outlined why interest rates may take the slow road higher.

Echoing words from the U.S. Federal Reserve, Tal said we’re in an “unusually uncertain market.” Canadian and U.S. central bankers would be the “first to admit” they don’t know what to do.

Canadian Interest Rate Forecast

Since the last rate forecast in January, the long-term projection for prime rate has fallen 1/4 percentage point.

Apart from that, the Big 6 banks' rate predictions haven't changed much.

Below you'll find a summary of the latest year-end interest rate projections from each of Canada’s major banks. Use them only as a rough guide because economist rate outlooks have considerable margins of error.

Economists On The Next BOC Rate Decision

As a whole, economists are all over the map on when the Bank of Canada will raise rates next. First-hike expectations range from May 31 to October 25.

For what it's worth, financial markets are now pricing in a September rate hike.

Primary dealers, on average, are looking for a July hike.

For those seeking additional perspective, here’s a sampling of the latest econospeak…

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Big 6 See Rate Hike in May or July

With the Bank of Canada maintaining the status quo yesterday, many are wondering what’s next for mortgage rates.

If you put any stock in the Big Six banks’ predictions, here’s the latest commentary from their professional ball gazers…

CIBC: “We're sticking with our view that an upgraded economic outlook in April's policy report will pave the way for a rate hike in May, assuming the C$ settles down a bit before then.”

Canadian Interest Rate Forecast

Economic optimism has ratcheted up a notch in the last month or so. In turn, bond yield expectations have bumped up roughly 1/4 percentage point since the last rate forecast in October.

Below you'll find a summary of the latest year-end interest rate projections from each of Canada’s Big 6 banks. Use them only as a rough guide because economist rate outlooks have considerable margins of error.

Canadian Interest Rate Forecast

After bursting out of the gates earlier this year, the economy is hobbling to the 2010 finish line.  With inflation well-contained, interest rate expectations are down across the board since the last rate forecast in August.

Rate Forecasting In Perspective

Major economists are paid well to tell us where interest rates are headed.  They have access to every data source, academic study, historical backtest, and analysis tool imaginable. While far from infallible, these forecasts serve as a point of reference when creating amortization models based on future rate assumptions.

Below you'll find a summary of the latest year-end interest rate projections from each of Canada’s Big 5 banks. Use them only as a rough guide because rate outlooks have considerable margins of error.

Latest Overnight Rate Forecast

The Bank of Canada's overnight target has a direct impact on variable mortgage rates.

Bank	2010	2011
BMO	1.00	2.25
CIBC	1.00	1.75
RBC	1.00	2.25
Scotia	1.00	1.75
TD	1.00	2.00
Year-end Avg	1.00	2.00
Chg vs Today	0.00	+1.00

(All figures rounded to the nearest 1/4 point increment.)

Latest 5-Year Government Bond Yield Forecast

Government bond yields drive 5-year fixed mortgage rates.

Bank	2010	2011
BMO	2.03	3.05
RBC	2.45	3.50
Scotia	1.85	2.50
TD	2.30	3.10
Year-end Avg	2.16	3.04
Chg vs Today	+0.29	+1.17

(CIBC's 5-year bond forecast was not available.)

Variable-Rate Mortgage Forecast

Most analysts now expect the Bank of Canada to remain on the sidelines until 2nd quarter 2011. On average, major economists now predict a 100 basis point increase in the overnight rate over the next 15 months.  Their outlooks, if accurate, imply a 4.00% prime rate by December 31, 2011. Prime rate is currently 3.00% and the 10-year average of prime is 4.50%.

Based on a 75-basis-point discount from prime, these forecasts suggests 5-year variable rates in the 3.25% range by year-end 2011.

Fixed-Rate Mortgage Forecast

Banks foresee 5-year bond yields climbing 117 basis points in the same 15-month timeframe.  That would put the 5-year yield at 3.41% by the end of next year.  The 10-year average of the five-year yield is 3.93%.

Assuming a typical 120 basis point spread above yields, these forecasts suggest deep-discounted 5-year fixed rates could rise to roughly 4.24% by year-end 2011.

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Things to Note:  These forecasts are made by the banks and are subject to frequent change. This data is provided only for general interest.  Always discuss your needs and risk tolerance with a mortgage professional before acting on any information you read online.

History has shown that it’s near impossible to accurately predict interest rates long-term so use these figures at your own risk. That said, while economist projections are often wrong, they are still one of the better sources of educated opinion on interest rates.

“Chg” = the expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All forecasts are based on the respective year-end.

Not all contributors have published updates since CMT's last rate forecast review. For banks providing mean quarterly overnight rate forecasts, we have averaged their Q4 and Q1 forecasts to estimate year-end figures for 2010 and 2011. Results are rounded to the nearest 1/4 point, in keeping with the Bank of Canada's standard rate setting increments.

Data Sources:  BMO, CIBC, RBC, Scotiabank, TD 

Canadian Interest Rate Forecast

Economists are paid handsomely to tell us where interest rates are headed.  They have access to every data source, academic study, historical backtest, and analysis tool imaginable. So if you're creating amortization models based on future rate forecasts, the estimates of bank economists can be a useful guide. 

Below you'll find a summary of the latest year-end interest rate projections from each of Canada’s Big 5 banks. Remember to use them only as a rough guide because rate outlooks have considerable margins of error.

Overnight Rate Forecast

The Bank of Canada's overnight target has a direct impact on variable mortgage rates.

Bank	2010	2011
BMO	1.00	2.50
CIBC	1.00	2.00
RBC	1.25	2.75
Scotia	1.00	2.25
TD	1.00	2.00
Year-end Avg	1.00	2.25
Chg vs Today	+0.25	+1.50

(All figures rounded to the nearest 1/4 point increment.)

5-Year Government Bond Yield Forecast

Government bond yields are major drivers of fixed mortgage rates.

Bank	2010	2011
BMO	2.45	3.58
RBC	2.45	3.50
Scotia	2.70	3.50
TD	2.40	3.05
Year-end Avg	2.50	3.41
Chg vs Today	+0.36	+1.27

(CIBC's 5-year bond forecast was not available.)

Variable-Rate Mortgage Forecast

Big bank economists have chopped their rate-hike forecasts again.  TD made the biggest adjustment earlier today. It slashed its 2011 year-end overnight rate estimate by one whole percentage point.  This underlines how dramatically expectations can change in just a few short months.

On average, major economists now expect a 150 basis point increase in the overnight rate over the next 16 months.  Their outlooks, if accurate, imply a 4.25% prime rate by December 31, 2011. Prime rate is currently 2.75%.

Based on a 70 basis point average discount from prime, this suggests 5-year variable rates in the 3.55% range by year-end 2011.  That's lower than today's typical discounted 5-year fixed rate.

As for the next rate hike, the signals are mixed. Canadian bond dealers are all expecting a 1/4 point increase at the Bank of Canada's September 8 rate meeting. The financial markets, however, are pricing in just a 30% probability of a hike.

After the next rate increase, most analysts now seem to expect the BoC to pause for a while.  "The coming policy pause could now easily last a year," says BMO.

Fixed-Rate Mortgage Forecast

Banks foresee 5-year bond yields climbing 127 basis points in the same 16-month timeframe.  That would put the 5-year yield at 3.41% by the end of next year.

Assuming a typical 120 basis point spread above yields, this suggests deep-discounted 5-year fixed rates could rise to roughly 4.61% by year-end 2011.

______________________________________________

Things To Note:  These forecasts are made by the banks and are subject to frequent change. This data is provided only for general interest.  Always discuss your needs and risk tolerance with a mortgage professional before acting on any information you read online. History has shown that it’s near impossible to accurately predict interest rates long-term so use these figures at your own risk. That said, while economist projections are often wrong, they are still one of the better sources of educated opinion on interest rates.

“Chg” = the expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All forecasts are based on the respective year-end.

Not all contributors have published updates since CMT's last rate forecast review. For banks providing mean quarterly overnight rate forecasts, we have averaged their Q4 and Q1 forecasts to estimate year-end figures for 2010 and 2011. Results are rounded to the nearest 1/4 point, in keeping with the Bank of Canada's rate setting increments.

Data Sources:  BMO, CIBC, RBC, Scotiabank, TD