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Economic Outlook: July

July 2, 2020
5 mins
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Investors almost unanimously expect the Bank of Canada to continue holding its overnight lending rate at 0.25% when it meets next on July 15. In fact, this is the expectation well beyond that meeting.

For that reason, instead of our usual rate outlook, we’re focusing on the prospects for an economic recovery. Until business and consumer spending gets back to some semblance of normal, the Bank’s monetary policy probably won’t change a heck of a lot.

Here’s a sampling of what economists have to say on the matter, and what you might see in the coming months. (Our comments in italics.)

TD Economics

  • “The lasting impacts of the pandemic will keep the Bank’s policy interest rate at its current level into 2022, at a minimum.” (Source)
  • “In past quarters, the outlook for the Bank of Canada had been tricky, as communications would shift in tone from one meeting to the next, and poor data was made more ambiguous by one-off shocks such as strikes and weather. There is no ambiguity now. The Bank of Canada has responded to the pandemic in dramatic fashion, taking the policy interest rate to its new lower bound and introducing a plethora of asset purchase programs aimed at keeping the financial plumbing (and thereby transmission of monetary policy) in good working order.”

The Bank’s unprecedented measures should continue weighing down bond rates for months, if not quarters.

RBC Economics

  • “We expect the BoC will continue to hold the overnight rate at its 'effective lower bound' of 0.25%.”
  • “The BoC’s asset purchase program remains open-ended. We think it will last at least a year, but are waiting on more detailed forward guidance when the bank has some clarity on the economic outlook.” (Source)
  • “Our economic forecast envisions the economy continuing to operate well below full capacity into 2021, only slightly better than the midpoint of the range of scenarios the BoC presented in April.” (Source)

If the BoC keeps buying bonds, it will keep yields lower than they’d otherwise be. Given the link between yields and fixed mortgage rates, it’s possible 5-year fixed rates may not rise significantly till at least 2021. Note, however, that yields usually rise in advance of a recovery as the market anticipates good news in the future.

Capital Economics

  • “We are growing more confident that the initial rebound in economic activity following the lockdown will be stronger than we first thought, but housing remains a key risk to the outlook beyond the next few months.”
  • “In terms of fundamentals, it now seems clear that household income has not fallen by anywhere near as much as we expected in the second quarter, despite the slump in employment.”
  • “While prospects in June, July and August may be brighter than we first assumed, there is still a big question mark over the outlook beyond that. The risk of a second wave of the coronavirus remains, and many firms and self-employed workers have tax liabilities due on 1 September, when the first CERB payments and mortgage deferrals are scheduled to end as well. “ (Source)

If government income support and payment deferrals end before unemployment abates, the housing market will come under pressure, save for pockets with extreme demand and too few listings (which currently includes the Toronto area, among others).

National Bank of Canada

  • “Despite a tentative re-opening of the economy currently underway, in Canada and elsewhere, highly accommodative policy will be needed for an extended period to secure recovery. To us, that suggests holding the policy rate at the lower effective bound of 0.25% through the end of 2021, if not longer.”
  • “Note that (BoC Governor Tiff) Macklem participated as an observer in the discussions surrounding [the June] rate decision … Look for Macklem to more naturally make his mark with the July 15th rate decision, which coincides with a Monetary Policy Report, after there’s been more time to evaluate the evolution of the economic recovery, labour market health and the effectiveness of the Bank’s various asset purchase facilities.”

Seven of nine professional forecasters surveyed by Bloomberg expect no change in the BoC’s key lending rate through September 2022. Two of nine expect just a 0.25-percentage-point increase by then.

BMO Economics

  • “There's plenty of uncertainty surrounding the outlook, and while the BoC expects a decent initial rebound, the growth picture beyond that will likely be more subdued, meaning policy will remain stimulative for some time.” (Source)

A “checkmark”-shaped recovery may well be in our future, as predicted by Allianz bond guru Mohamed El-Erian.

Latest Rates & Forecasts

  • Bank of Canada Overnight Rate: 0.25% [1]
  • Bank of Canada Estimated Neutral Rate: 2.25% to 3.25% [2]
  • BoC Rate Cuts Priced in this Year: Just a 6% chance of an additional cut by year-end [3]
  • Prime Rate: 2.45% [4]
  • Prime Rate Forecast (Consensus forecast at year-end 2021): 2.45% [5]
  • Lowest Nationally-advertised 5-year Fixed Rate (insured): 1.99% [6]
  • Lowest Nationally-advertised 5-year Fixed Rate (uninsured): 2.14% [6]
  • Five-year fixed rate (Consensus forecast at year-end 2020): 2.08% [7]

[1] The overnight rate is the interest rate the Bank of Canada uses to control inflation. It raises the overnight rate to slow inflation and vice versa. The overnight rate is the No. 1 determinant of prime rate, the basis for variable-rate mortgages.

[2] The neutral rate is the theoretical Bank of Canada overnight rate that neither boosts nor restrains economic growth. It’s updated every April.

[3] This is the implied number of Bank of Canada rate changes based on prices of overnight index swaps (OIS). OIS are bond market derivatives that traders use to bet on the direction of interest rates.

[4] Prime rate is tracked by the Bank of Canada. It equals the typical (mode average) prime rate of the six largest Canadian banks.

[5] This figure equals the year-end 2021 overnight rate forecast from major economists (as tracked by Bloomberg) plus a 220-basis point spread (which is the current spread between prime rate and the overnight rate).

[6] As of the date of this publication, as tracked by

[7] This figure equals the year-end 2021 five-year Government of Canada bond yield forecast from major economists (as tracked by Bloomberg) plus a 150-basis-point spread (which is a typical competitive spread between the five-year yield and average five-year fixed rates).


The RATESDOTCA editorial team are experienced writers focused on sharing stories and bringing you the latest news in insurance and personal finance. Our goal is to provide Canadians with the information and resources they need to make better insurance and financial decisions.

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