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July 2021 | Rate Outlook

June 30, 2021
5 mins
Woman sitting near mountain and lake looking out

The Canadian economic recovery will soon be in full-gear. When that happens the focus will gradually shift from how to support the economy, to how to remove that support.

Observers are watching with eagle eyes for signs of when the Bank of Canada might start removing interest rate stimulus. It's widely expected to "taper" its bond-buying program in July. That program has been supportive of lower fixed rates for over a year now.

Also on the horizon are anticipated rate hikes. The first one is expected in the second half of next year. That would have an immediate impact on floating-rate borrowers at the time. It could also boost fixed mortgage rates because those are based on bond yields, which tend to anticipate Bank of Canada policy tightening and rise ahead of it.

For more analysis on the macro rate picture, here's a sampling of recent economist insights…

National Bank of Canada

On the BoC’s forward guidance: “As for the policy rate, it’s unlikely July will bring a change in forward guidance but we continue to flag the BoC’s less flexible policy mandate and upside risks to output gap closure as drivers for a rate hike earlier in its forward guidance “window” (i.e. in Q3 2022 rather than Q4 2022).” (Source)

The Dot’s Take: Pundits fear that economists, and the Bank of Canada itself, may move up rate hike forecasts if inflation maintains its torrid pace.

Capital Economics

On GDP: “Even though the latest preliminary estimate suggests that GDP fell by 0.3% m/m again in May, the better result in April, as well as a slight upward revision to growth in March, means that GDP is likely to expand by 3.5% annualised this quarter. That would be only marginally weaker than the Bank of Canada expects and therefore suggests that the Bank will continue to taper its asset purchases at the next meeting in July.”

The Dot’s Take: When the Bank of Canada tapers (reduces) the amount of 5-year bonds it's been purchasing, fixed mortgage rates sh0uld increase, other things equal. But the rate increase directly resulting from this change shouldn't be too painful.

BMO

On bond yields: “Despite the recent stability, we look for yields to drift modestly higher by year-end, to around 1.75% (which they already flirted with at March-end). This reflects the mostly-priced-in trifecta of stronger growth, faster inflation and big budget deficits. In 2022, tapering and tightening speculation should augment the moderate upward pressure on yields, ending around 2.00%.” (Source)

The Dot’s Take: If BMO is right, it would imply a roughly 75 basis point bump up in 5-year fixed rates by December 31, 2021. That's significant in that it would cost an average borrower (with the average mortgage) about $11,500 more interest over a five-year term.

RBC

On the outlook for monetary policy support: “Central banks are keeping a close eye on re-opening as they evaluate how long extraordinary monetary policy support needs to remain in place. The BoC still stands out as relatively hawkish, having already begun to taper asset purchases and still guiding markets toward a rate hike in the second half of 2022…The BoC is likely to continue reducing asset purchases in the second half of the year ahead of expected rate hikes in H2/22.” (Source)

The Dot’s Take: Nothing in RBC's forecast, or virtually any major economist's forecast, would suggest that rates are not going to head higher in the next 12-18 months. The consensus has been wrong before but this time there's a high probability it'll be right, barring an economic shock out of left field.

Latest Rates & Forecasts

  • Overnight Rate: 0.25% [1]
  • Next Bank of Canada rate decision: July 14, 2021
  • Neutral Rate (BoC Estimate): 1.75% to 2.75% [2]
  • BoC Rate Changes Expected by Year-end 2021: None [3]
  • Prime Rate: 2.45% [4]
  • Prime Rate Forecast (Economist forecast at year-end 2021): 2.45% [5]
  • 5-year Government Yield (Economist forecast at year-end 2021): 1.20% [6]
  • 5-year Government Yield (Economist forecast at year-end 2022): 1.80% [6]
  • 5-year Fixed Rate (As of today): 2.09% [7]
  • 5-year Fixed Rate (Forward rate forecast in one year): 2.61% [8]

________________________________________

[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 once a year. (Latest estimate)

[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] Average of latest published year-end 5-year yield estimates from BMO (1.00%), National Bank (1.20%), RBC (1.20%), Scotiabank (1.45%), TD (1.35%).

[7] The lowest nationally available uninsured 5-year fixed rate on the date of this publication, as tracked by RATESDOTCA.

[8] This figure equals the projected 5-year Government of Canada bond yield one year from now, as tracked by Bloomberg in the forward rate market, plus a 135-basis-point spread (which is a typical spread between the 5-year yield and the lowest nationally available uninsured 5-year fixed rates).

Rob McLister

Rob McLister has been informing mortgage consumers and professionals since 2007. In that time, he’s written more than 2,500 mortgage stories for publications ranging from the Globe and Mail — where he presently serves as mortgage columnist — to the National Post, Maclean’s, Canadian Mortgage Trends and RateSpy.com. Regularly quoted throughout the media, Rob is a committed advocate of greater transparency in the mortgage industry. He’s also been a vocal consumer advocate for more sensible mortgage regulation. In 2011, he launched two mortgage fintechs: mortgage comparison website RateSpy.com and digital mortgage broker intelliMortgage Inc. The former is the go-to source of Canadian mortgage news and the only site comparing all publicly advertised prime mortgage rates. The latter is Canada's leading online mortgage provider for self-directed borrowers. Both companies were acquired in 2019 by RATESDOTCA Group Ltd.

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