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.

**Latest Overnight Rate Forecast**

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

Bank20112012BMO 2.00 3.75 CIBC 2.00 N/A NBC 2.00 2.75 RBC 2.00 3.50 Scotia 1.50 2.25 TD 2.00 3.00 Year-end Avg2.003.00Chg vs Today+1.00+2.00

(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.

Bank20112012BMO 3.53 4.15 NBC 3.45 3.81 RBC 3.55 4.05 Scotia 2.65 3.00 TD 3.25 3.75 Year-end Avg3.293.75Chg vs Today+0.75+1.21(CIBC’s 5-year bond forecast was not available.)

**Variable-Rate Mortgage Forecast**

Analysts still expect the Bank of Canada to remain on the sidelines until 2nd quarter 2011. On average, major economists now predict a 200 basis point increase in the overnight rate over the next 24 months. Their outlooks, if accurate, imply a 5.00% prime rate by December 31, 2012. Prime rate is currently 3.00% and the 10-year average of prime is 4.48%.

Based on a 75-basis-point discount from prime, these forecasts suggest 5-year variable rates in the 4.25% range by year-end 2012.

**Fixed-Rate Mortgage Forecast**

Banks foresee 5-year bond yields climbing 121 basis points in the same 24-month timeframe. That would put the 5-year yield at 3.75% by the end of next year. The 10-year average of the five-year yield is 3.71%.

Assuming a typical 120 basis point spread above yields, these forecasts suggest deep-discounted 5-year fixed rates could rise to roughly 4.95% by year-end 2012.

**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.

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**Other 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.

Bank estimates are taken from the latest forecasts published on their respective websites. For banks reporting rate forecasts as averages for a quarter, we have averaged their Q4 and Q1 forecasts to estimate year-end figures for 2011 and 2012. Overnight rate 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, NBC (National Bank), RBC, Scotiabank, TD