Optimistic vaccine news has boosted market sentiment. Bond yields, which traditionally lead fixed mortgage rates, have risen somewhat as a result.
But the Bank of Canada continues to set expectations that interest rates will stay down for the foreseeable future. In parliamentary testimony last week, BoC Governor Tiff Macklem reiterated that borrowing costs will “remain very low for a long time.”
And while he’s been cool to the idea of negative interest rates, Macklem added, “We could potentially lower the effective lower bound…without going negative.”
That means, rather than the Bank of Canada’s standard 25-basis-point rate moves, it could lower rates by a smaller increment, say from 0.25% to 0.10%, should the need arise. Or perhaps it simply cuts another 0.25% but keeps the overnight rate at 0%. A cut of any sort is a low probability at this point, but it seems slightly more likely than it was one week ago.
This is one of many unknowns as we look ahead and gauge the strength of our economic recovery. If you’re a mortgage borrower trying to parse all of this, here are the latest interpretations from some of Canada’s top economists…
On rising yields: “Canadian yields historically follow U.S. yields quite closely and the vaccine news is universally positive. So, it’s not a surprise that the 10-year reached a high of 0.77% on the day of the vaccine announcement, which is 34 basis points higher than the low on August 4th. And, much like the Federal Reserve, the Bank of Canada is committed to maintaining the policy rate low for longer…This too points to a steeper yield curve in the months ahead, but also the possibility that a faster normalization of the economy will pull forward the timing of potential rate hikes. (Source)
The Dot’s Take: Add to that the Liberal government’s new fiscal plan, which calls for massive deficits: Almost $400 billion in 2020-21, $121 billion in 2021-22 and $50+ billion in 2022-23. The more the government spends and borrows, the higher rates go and the faster they go higher. Mind you, analysts project we’re still looking at several quarters before any significant rate increases.
On stimulus: “Governments (around the world) have extended some support programs to manage the economic fallout of renewed containment measures, and a number of central banks are doing their part by providing additional stimulus…Both the Fed and BoC stand ready to add stimulus if necessary, but seem content with the accommodation they’re providing at this stage. Central banks focused on keeping borrowing costs low and will keep a watchful eye on rising yields, but might be reluctant to push back against modest increases that reflect improving economic prospects.”
The Dot’s Take: In other words, yields may rise if the outlook continues to brighten. The Bank of Canada’s quantitative easing (QE) program may slow the rise, but it won’t stop it. Don’t rely on QE to push fixed mortgage rates to new lows. That would only happen if the economy went back into a tailspin in 2021, a lower than 50% probability at this point.
On monetary policy in the face of a second wave of COVID: “Monetary policy likely won’t see much impact, with the Bank of Canada already guiding to extraordinary support much deeper into the recovery. The October Monetary Policy Report pegged Q4 growth at 1.0% annualized, which doesn’t look unreasonable even after the second wave of measures. Their 4.2% outlook for 2021 also builds in softer growth next year than we’re currently assuming.” (Source)
The Dot’s Take: In other words, it’s more probable that rates remain reasonably low in 2021 than rebound up to pre-COVID levels.
BoC Governor Tiff Macklem
On the future of interest rates: “We want to be very clear, Canadians can be confident that borrowing costs are going to remain very low for a long time. In this way, our forward guidance combined with our QE program reduce one source of uncertainty.” (Source)
But that statement came with one small caveat: “If it turns out that we’re wrong and there is more inflationary pressure than we expect, we will adjust (policy).”
The Dot’s Take: “Very low” likely means below the long-term average and not significantly above the current 0.25% level. What it likely doesn’t mean is at the current 0.25% level. The takeaway for mortgage shoppers is that rates are not far from their low for this interest rate cycle. While rates aren’t in danger of a near-term jump, there’s no need to wait for even lower rates before locking in – assuming locking in is the right move for you.
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Latest Rates & Forecasts
- Overnight Rate: 0.25% 
- 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): 0.73% 
- 5-year Fixed Rate (As of today): 1.67% 
- 5-year Fixed Rate (Economist forecast at year-end 2021): 2.24% 
 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).
 Average of latest published 5-year yield estimates from BMO (0.50%), National Bank (0.50%), RBC (0.65%), Scotiabank (1.10%), TD (0.90%)
 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).