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Long-Term Mortgage Rate Forecast: Down Big

Economic worries have led major economists to slash their long-term interest rate predictions.

The big banks’ average forecasts for Canada’s overnight rate and 5-year bond have plunged 60 and 57 basis points respectively. That’s compared to our last rate forecast review just two months ago.

What follows are the latest long-term interest rate projections from each of Canada’s Big 5 banks (these are year-end numbers)…

Overnight Rate Forecast

Bank 2010 2011
BMO 1.05 2.60
CIBC 1.25 2.25
RBC 1.25 2.75
Scotia 1.00 2.25
TD    1.50   3.00  
Avg 1.21 2.57
Chg vs Today 0.71 2.07

5-Year Government Bond Yield Forecast

Bank 2010 2011
BMO 2.63 3.6
RBC 2.85 3.5
Scotia 2.70 3.50
TD    3.20   3.75  
Avg 2.85 3.59
Chg vs Today 0.32 1.06

(CIBC did not publish a 5-year bond forecast.)

Variable-Rate Mortgage Forecast

Big bank economists, on average, expect a 207 basis point increase in the overnight rate over the next 18 months.  Their outlooks, if accurate, imply a 4.50% prime rate by December 31, 2011. Prime rate is currently 2.50%, and expected to increase 1/4 point on July 20.

Based on a 65 basis point average discount from prime, this suggests 5-year variable rates in the 3.85% range by year-end 2011. They’re around 1.90% today, give or take 0.10%.

Fixed-Rate Mortgage Forecast

Banks foresee 5-year bond yields climbing 106 basis points in the same 18-month timeframe.  That would put the 5-year yield at 3.59% 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 4.79% by year-end 2011.


Here’s a sampling of what the banks’ “professional predictors” (economists) are saying now:

  • BMO:
    • “We look for the Bank of Canada to raise its policy rate 25 bps to 0.75% on July 20.”
    • Expect “the earliest (U.S.) Federal Reserve rate hike in 2011Q3.”
    • “We look for the Bank of Canada to pause for at least a couple of announcement dates through the autumn.”
  • CIBC:
    • The BoC will take the “overnight target higher by two or three more quarter point steps. Thereafter, the Bank is likely to stay on hold until US conditions…are healthy enough for the Fed to be close to hiking.”
  • RBC:
    • “Canada’s domestic economy is in good shape with the Bank watching events abroad. To date, the effect on Canada has been limited thereby paving the way for another rate increase later this month.”
    • “The (U.S.) Fed will hold the Funds target in its current range until the second quarter of 2011 rather than hiking at the end of this year.”
    • “Canada’s recovery will continue at a decent clip in late 2010 and early 2011.”
  • Scotia:
    • “This pace (of Canada’s recovery) is almost twice as fast as that seen after the 1982 recession, and well ahead of the sluggish recovery in the early to mid-1990s.”
  • TD:
    • Canada’s labour market has posted “an astounding performance given that it typically has taken 6-11 quarters to recover losses in past Canadian recessions.”


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.

For banks providing mean quarterly forecasts, we have averaged their Q4 and Q1 forecasts to estimate year-end figures for 2010 and 2011.

Data Source:  BMO, CIBC, RBC, Scotia, TD