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MORTGAGE RATE FORECAST: Strong Canadian Economy Could Signal Change in Interest Rates

Mortgage Rate Outlook For the past six months, the relative calm in the Canadian economy meant that mortgage rates were guided more by external factors than domestic ones. Most prominent has been the quieting of previously bullish sentiment on US growth and inflation, as neither the trillion-dollar infrastructure plan nor tax cuts promised by the Trump administration have been proposed, never mind passed, despite one-party control of Congress. Bond markets have taken notice of this inaction, dramatically revising down expectations. Consequently, bond yield spent much of the last three months sliding back toward pre-election levels.

Pushing against this trend, the US Federal Reserve (the Fed) remains steadfast in its desire to normalize interest rates as the US economy pushes up against full employment. The Fed has now raised rates three time in seven months and continues to signal further rate hikes on the horizon. More importantly, the Bank of Canada, sensing a turn in the economy following three quarters of strong economic and job growth, has seemingly turned hawkish with recent speeches by key policymakers designed to prime markets for an approaching tightening cycle. Those factors seem to be gaining significant traction as rates across the short end of the Canadian yield curve, including the benchmark 5-year Government of Canada bond yield, have increased by about 25 basis points in a matter of weeks. The 5-year yield is now close to where it was at the start of 2017, when 5-year fixed rates were about 30 basis points higher.

Assuming the Canadian economy continues its current trend, the shift in the bond market means that the recent downtrend in 5-year fixed mortgage rates offered by banks and other lenders will likely reverse by the end of the summer. Overall, we expect that the posted rate will remain unchanged in 2017, while discount rates will gradually rise to just under 3 per cent by the end of the year.

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