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.

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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 rate setting increments.

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

  1. I have found good economists to be right on rate direction about 55-60% of the time. What they can’t do well is predict the magnitude of rate changes. No one alive can do that and be accurate consistently. That doesn’t mean economic forecasts aren’t useful.

  2. Ollie:
    Right 55-60%..Ouch.
    I could toss a coin and be correct 50% of the time -statistically speaking.
    I am not saying those forecasts aren’t useful. They may be for some, but not for most imho.
    -Someone more cynical would say that those forecasts are very useful in directing customers & markets in certain ways!

  3. Just to stick up for my economist bretheren – I find it annoying when people get bent out of shape with respect to inaccurate forecasts. When you predict the future, you’re going to be wrong nearly 100% of the time, to varying degrees.
    I’ll save everyone a lot of trouble: read forecasts accordingly.
    Modern economies are incredibly complex, especially given the degree of global integration in today’s world. It’s literally impossible for any one person or organization to be intimately familiar with all emerging economic issues.
    Hindsight makes forecasting look pretty simple, but it’s not. All kinds of things come out of the blue to upset projections. The best that can be done is to look at assumptions and market consensus.

  4. Hi John,
    I’d echo Al R’s comments and remind folks just how hard it is to be right that extra 5-10% of the time (assuming that’s the actual number).
    It’s not unlike picking winners in the NFL. Those who are 57-60% right are the Gods of the sports betting world. Consistently overcoming the extraordinary handicap of random events is no small feat.
    Cheers,
    Rob

  5. John your link was very helpful and I wanted to thank you. I’m trying to determine if I should change to a fixed rate mortgage and I feel that you have helped me answer my question more so than any other source I’ve attempted to learn from. The changes in forecast predictions since May are quite significant… I’m sticking with a variable rate for now.
    Thanks again

  6. Economists can just as easily raise their rate forecasts. Don’t lose sight of that. IMO rates will move closer to their long-term average in 2011. If/when that happens then a variable rate will not be the best move.

  7. Folks,
    I wasn’t trying to take shots at the experts, but wanted to note the fact that these highly paid forecasters do change the tune fairly often. Yes, it is a complex matter, but if the forecast is 50-50 then what is the point ?
    Remember all the hoopla in April/May of this year why everyone should be locking into fixed terms ASAP. There are many who did, and I am sure the banks are damn happy about it now.
    I am glad that Mel found the link I provided to be useful. Mel shouldn’t thank me; Thank Rob for maintaining this site. Link was to a previous article by Rob just a few months ago.
    Now, do we really have any statistics that these folks are right 55-60% of the time :-)

  8. Hi John,
    You’re absolutely right that our economist friends tend to flip-flop more than a fish out of water. Such is the nature of economics…until someone outlaws the unexpected.
    I’ve talked to numerous economists over the years and they often claim to be over 50% in predicting rate direction, but few can cite a track record to back it up.
    Based on my experience, most rate predictions tend to be a coin flip, but certain major economists do seem to be better coin flippers than the average Joe.
    Cheers,
    Rob

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