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A Delicate Recovery Should Keep Mortgage Rates Low

Aug. 30, 2020
4 mins
economic forecast.jpg

It’s a tough road back from the deepest recession of all time. Yet, Canada’s economy continues to make strides on its road to recovery. The unemployment rate has plunged almost three percentage points in the last two months. Meanwhile, housing starts and home sales are back to pre-COVID levels, with average prices in multiple markets setting new records.

The question is, is the recovery running out of gas? Could a resurgence of COVID cases unravel everything once again? Will the end of mortgage deferrals trigger an increase in defaults and stall the recovery?

The answers to these questions are yet to be known. But here’s how some experts are guessing at the answers...

Capital Economics

“The 419,000 rise in employment in July means that 55% of the three million pandemic-related job losses have now been reversed. We expect further employment gains in August and September to pull the unemployment rate back below 10%, but the pace of labour market improvement is likely to slow markedly beyond then.”

Mortgage Rate Impact: Bearish

RBC Economics

“Canada has done a better job of keeping its [COVID] case curve flat and should see a sizeable rebound in Q3 GDP. But less supportive fiscal policy, ongoing social distancing measures and weakness in the oil and gas sector will likely result in a slower recovery later this year.” (Source)

Mortgage Rate Impact: Bearish

National Bank of Canada

“Household finances are not yet feeling the damage to the economy, which could explain the resilience of consumer spending…Also, financially struggling Canadian households have been able to delay or skip debt repayments for a few months…One thing is certain: the period of weaning from (the government’s) extraordinary fiscal stimulus will be a perilous time.” (Source)

Mortgage Rate Impact: Bearish

TD Economics

“Strong housing demand continues to drive [the resilience of homebuilding activity], supported in part by the impacts of past increases in population growth and demand more broadly, as well as historically low borrowing rates. These forces should continue to support housing activity in the near term. However, as these forces wane, a slowdown in population growth (driven by lower immigration) will be a key downside risk to housing activity.” (Source)

Mortgage Rate Impact: Bearish

And on future interest rate movements….

BMO Economics

“Business destruction could reduce the size of the output gap, thereby keeping a floor under inflation, but longer-term disinflationary forces will form the ceiling. All told, the inflation data will be far more interesting than in the recent past, but the near-term implications for policy at this point might be limited—central banks will remain highly accommodative.” (Source)

Mortgage Rate Impact: Mixed

RBC Economics

“The Bank of Canada has committed to keeping interest rates low until the economy is back at full capacity and inflation returns to 2%. While inflation jumped higher in June, we think it will remain below target at least through 2021, making rate hikes a distant prospect.” (Source)

Mortgage Rate Impact: Bearish Near Term

Clearly the economic outlook isn’t blatantly positive. To drive mortgage rates higher, Canada needs unmistakable signs of economic acceleration and/or overheating inflation. And that’s simply not in the cards at the moment, particularly with higher mortgage defaults pending (as mortgage deferrals and government income subsidies expire next quarter).

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: Less than a 4% 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]
  • Average Canadian 5-year Fixed Rate: 1.86% [6]
  • 5-year fixed rate (Consensus forecast at year-end 2021): 2.33% [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 #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 5-year Government of Canada bond yield forecast from major economists (as tracked by Bloomberg) plus a 150-basis-point spread (which is the typical spread between the 5-year yield and average 5-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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