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Rebounding Economy Likely Means Rate Hikes Sooner Than Expected

May 2021 | Rate Outlook

May 3, 2021
6 mins
A young couple are shown documents by an older man

"Why do they call it the novel coronavirus? It’s a long story...”—The Scotsman

Despite fresh lockdown restrictions, the number guessers (economists) seem to universally anticipate strong growth ahead.

Perhaps too strong.

There’s a chance, many say, that excess demand and inadequate supply could spark core inflation well above the Bank of Canada’s 2% target.

If that indeed happened, authorities may well hike interest rates earlier than previously forecast. In fact, the Bank’s Governing Council said as much at its last rate meeting, suggesting the first rate hikes could now come by the end of 2022 instead of 2023, as it had communicated at past meetings.

To help you decipher all this, we’ve collected some relevant insights from the usual suspects…

Bank of Canada Governing Council

"We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved. Based on the bank's latest projection, this is now expected to happen some time in the second half of 2022.” (Source)

The Dot’s Take: Stay tuned. The second half of 2022 may well become the “first half of 2022” if inflation hawks are right.

National Bank of Canada

On Canada’s GDP growth: “Not only was GDP up 0.7% in January despite the shutdown of non-essential Ontario and Quebec businesses in that month, but Statistics Canada’s preliminary estimate suggests a 0.5% increase in February. That would make a 10th straight month of expansion, leaving GDP down only 2.0% from its pre-recession peak after just one year (a much better showing than in the three previous recessions), and set for an enviable first-quarter gain of 5.7% annualized. (Source)

The Dot’s Take: Remarkable what a $350-billion deficit can do to prop up an economy, eh? The last time governments spent this much was World War II. A few years later, inflation was in the double digits. That won’t happen this time, but it would be ludicrous to assume inflation will stay on target. And that doesn’t mean the rapper.

CIBC Capital Markets

On BoC rate-hike guidance: “[BoC Governor Tiff] Macklem said their guidance was that they wouldn’t raise rates before slack had been absorbed, expecting that to occur in the second half of 2022. But, he noted, the guidance didn’t say they would mechanically then raise rates when we get there. So again, he’s leaving the door open to a more protracted pause should the growth and inflation outlook for 2023 look to be sufficiently in check.” (Source)

The Dot’s Take: The prediction business is tough, so we try to cut the BoC some slack. Nonetheless, it’s notable how it first suggested a hike in 2023 and now it’s citing 2022, but with a caveat that it could take longer. Nothing like covering your bases. Nevermind that millions of Canadians are relying on the Bank’s forward guidance to make borrowing decisions.


On the BoC’s tapering of bond purchases (from $4B/week to $3B): “If Governor Macklem continues to adhere to prior guidance that net purchases would end before spare capacity is eliminated, then that probably counsels fully ending purchases later this year conditional upon when the output gap shuts.” (Source)

The Dot’s Take: We’re starting to wonder, who cares? BoC bond-buying now seems to have only a barely perceptible influence on fixed mortgage rates, despite the Bank’s tweaks.

TD Bank

On future interest rate moves: “Monetary policy is a blunt tool that works in the aggregate and central bankers will have difficulty fine-tuning it to achieve a goldilocks outcome in the labour market. That responsibility will rest with government policies. As 2022 unfolds, we expect central bank communication to tilt towards a risk-management lens of leaving rates too low for too long.” (Source)

The Dot’s Take: One of the worst things the BoC could possibly do is start hiking rates after inflation starts a self-fulfilling cycle. When public inflation expectations become significantly detached from the 2% mid-point target, all bets are off — and in that case, you better be in a fixed (rate, that is).

Today's Featured RatesUpdated 12:52 ET on Jul 18, 2024

Rates are based on a $300,000 mortgage.

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3 Yr Variable
Loan to value
80.01% to 95%
Rate held until
Oct 18
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5 Yr Variable
Loan to value
80.01% to 95%
Rate held until
Nov 17
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5 Yr Fixed
Loan to value
80.01% to 95%
Rate held until
Sep 03

Latest Rates & Forecasts

  • Overnight Rate: 0.25% [1]
  • Next Bank of Canada rate decision: June 9, 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 (Forward rate forecast at year-end 2021): 1.26% [6]
  • 5-year Fixed Rate (As of today): 1.99% [7]
  • 5-year Fixed Rate (Forward rate forecast at year-end 2021): 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 5-year yield estimates from BMO (1.05%), National Bank (1.10%), RBC (1.20%), Scotiabank (1.45%), TD (1.40%).

[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 year-end 2021 5-year Government of Canada bond yield, 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).


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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