For the better part of last year, it seemed the pandemic would never end. Now, a new year brings new hope that vaccines will shift our economic recovery into second gear.
But record infection cases mean the recovery has a long way to go. Bank of Canada (BoC) Governor Tiff Macklem said as much in his final speech of 2020, admitting the recovery is at a “difficult stage.”
What does that mean for mortgage rates? Well, our last Outlook noted there’s still the potential for the BoC to lower rates, likely by less than the traditional quarter-point (0.25%) increment. But a rate cut in 2021 remains less than a 50% probability, say economists (whatever that’s worth).
A better bet is that interest rates spend part of 2021 near record-lows before lifting off later this year.
For more on that and rate prognostications in general, here’s a sampling of what big-name economists are saying now — and our translation for mortgage shoppers.
National Bank of Canada
On a potential 2021 rate cut: “While there’s been market chatter about the potential for a ‘mini’ rate cut after Tiff Macklem acknowledged this was technically possible without going negative, we’d rule this out as a possibility barring a significant deterioration in financial conditions or the economic outlook. Moreover, the Bank has made it clear that it considers 0.25% the effective lower bound.” (Source)
The Dot’s Take: Don’t choose a variable rate because you think the Bank of Canada will cut again. If they do, you might have just a year or two at lower rates before borrowing costs start climbing (not a prediction). Balance that with the risk that rates go horizontal before climbing late next year (the consensus economist forecast).
On the economy’s bounceback: “…while a second wave and associated restrictions are sapping economic momentum heading into 2021, we’re now expecting the recovery will pick up steam as the year progresses…we think investors will eventually begin to contemplate an exit from highly accommodative monetary policy. Stronger growth and more two-sided inflation risks should also contribute to government bond yields drifting higher in 2021.”
But RBC acknowledges that “The outlook isn’t entirely rosy—the coming months still present serious challenges…” (Source)
The Dot’s Take: No one expects a jump in rates in the first quarter. But once vaccinations appear more readily available and viral case counts plummet, consumer spending will rebound. Consumer confidence is already riding at pre-pandemic levels, especially among the key homebuying demographic.
On the 2021 rate outlook: “The Bank of Canada’s task for 2021 will be to ensure that financial conditions don’t tighten prematurely. Our base case is for policy rates to hold steady at 25 bps throughout the year. Rate hikes are off the table, though further easing is possible but would take a deterioration in the outlook (think vaccine issues or something like that). Potential easing measures [include] more QE (quantitative easing), yield curve control, a funding-for-lending scheme and a micro rate cut. (Source)
The Dot’s Take: It’s likely that none of these potential BoC actions would take rates down significantly — again, not enough to go variable for.
BoC Governor Tiff Macklem
On COVID and the economic outlook: “The economic recovery from the pandemic is at a very difficult stage. Near term, rising COVID-19 infections will dampen growth and could even deepen our economic hole. Uncertainty is elevated, and the recovery is going to be long and choppy.” (Source)
The Dot’s Take: Exactly what you’d expect a central banker to say when they’re determined to bring inflation back above 2%.
Compare Mortgage Rates
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Latest Rates & Forecasts
- Overnight Rate: 0.25% 
- Next Bank of Canada rate decision: January 20, 2021
- Neutral Rate (BoC Estimate): 2.25% to 3.25% 
- BoC Rate Changes Expected by Year-end 2021: None 
- Prime Rate: 2.45% 
- Prime Rate Forecast (Economist forecast at year-end 2021): 2.45% 
- 5-year Government Yield (Economist forecast at year-end 2021): 0.80% 
- 5-year Fixed Rate (As of today): 1.52% 
- 5-year Fixed Rate (Economist forecast at year-end 2021): 1.93% 
 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.
 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)
 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.
 Prime rate is tracked by the Bank of Canada. It equals the typical (mode average) prime rate of the six largest Canadian banks.
 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).
 As of the date of this publication, as tracked by RateSpy.com
 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).