Canada Interest Rate Forecast | Perch (2023)

When is the next Bank of Canada rate increase and what can I expect?

The current market overnight interest rate forecast for the next 12 months is:

  • No change June 7, 2023
  • No change July 12, 2023
  • No change September 6, 2023
  • A 0.25% decrease October 25, 2023
  • No change December 6th, 2023
Variable Rate Interest Forecast 2023 to 2028 (as of May 2023)
Date 5-year variable rates
2023-06-30 5.86%
2023-12-31 5.45%
2024-06-30 4.79%
2024-12-31 4.17%
2025-06-30 4.09%
2025-12-31 3.71%
2026-06-30 3.67%
2026-12-31 3.39%
2027-06-30 3.62%
2027-12-31 3.46%
2028-06-30 3.81%
2028-12-31 3.74%

What are Canada’s bank economists predicting for the June 7th Bank of Canada rate announcement?

Most bank economists believe that there will be no more rate hikes for the remainder of the year and to possibly expect rate cuts in 2024.

RBC economists Nathan Janzez and Carrie Freestone say that the BoC’s pause on rate hiking was driven by an expectation that growth would stall through mid-2023 and don’t think that test has been met yet since many of the effects of last year’s aggressive increases have yet to ripple through the economy. The recent round of financial instability is a reminder that aggressive interest rate increases over the last year could yet have unexpected consequences. Inflation (and the broader economy) are still running too hot for the Bank of Canada to actively consider cutting interest rates but staying on the sidelines for now looks like an easy decision to make.

TD Bank senior economist James Orlando, says that inflation has likely peaked in Canada and they expect further easing in price pressures in 2023 and 2024. This should allow the Bank of Canada to maintain the overnight rate at the current 4.5% level through 2023. Both short-term and long-term bond yields are likely to decline over 2023 as policy rate cuts become closer to being realized. TD economists assume the overnight rate is reduced back towards its neutral level starting at the beginning of 2024, with the rate reaching 2.25% by 2025.

BMO’s chief economist, Douglas Porter, says “the Bank of Canada is comfortably on hold for the time being with inflation slowing in line with its forecast. The Bank’s expectation that the economy will be in excess supply by the second half of the year opens the door to potential easing later this year if inflation continues to slow, but there’s still a lot of wood to chop on that front. In fact, the Governor explicitly stated in the press conference that market pricing of rate cuts later this year isn’t the most likely scenario”. Porter expects that the Bank will remain on hold until the end of 2023 before rate cuts begin in early 2024.

Commentary from Alex Leduc, Principal Mortgage Broker and CEO of Perch:

  • Buyers are coming back to the market and the real estate market is seeing more activity. We believe that the property prices have hit their bottom and we’ll see flatlining for the next quarter and increases in property prices in the second half of 2023 and into 2024
  • Borrowers won’t see lower rates for at least 1 year, but the property prices you see today are as low as it’s going to go. The next few months will be a very opportune time to buy and anyone on the sidelines should seriously consider executing now before the window of opportunity closes
  • Prime rates have hit their ceiling and are expected to remain around their current level until the end of 2023. The Bank of Canada is anticipated to cut rates by 1% over 2024 and another 1% over 2025. Adjustable rate mortgage holders will see lower payments.

How does inflation affect future Bank of Canada interest rate changes?

In April, the Consumer Price Index (CPI) rose 4.4% year over year, after a 4.3% increase in March, making this the first acceleration in headline consumer inflation since June 2022. Core CPI eased from 4.3% in March to 4.1%.

Higher rent prices and mortgage interest costs contributed the most to the all-items CPI increase in April 2023 on a year-over-year basis. On a monthly basis, CPI was up 0.7% in April following a 0.5% gain in March. Homeowners’ replacement cost index continued to slow, as it rose 0.2% compared to the 1.7% increase in March.

Shelter costs increased 4.9% on a year-over-year basis in April, after a 5.4% increase in March. Canadians continued to pay more in mortgage interest cost in April with an increase of 28.5% compared to April 2022, as more mortgages were initiated or renewed at higher interest rates. The higher interest rate environment may also be contributing to rising rents in April 2023 , and increase of 6.1%, creating higher rental demand.

What is the Canadian prime rate?

The Canadian prime ratestays at 6.70% effective April 12, 2023. The prime rate is what major banks and financial institutions in Canada use to set interest rates for loans and lines of credit which also include variable rate mortgages.

How does the prime rate affect mortgage rates in Canada?

In Canada, there are two main types of mortgages, fixed rate and variable rate. With a fixed mortgage you will pay the same rate over the entire course of your mortgage term and it will not be affected by the market. So if the prime rate goes up, your fixed rate will stay the same. A fixed rate mortgage is a good option if you like to know exactly how much your mortgage payments will be until you need to renew. A fixed rate is also good in a rising rate environment since you lock in your rate regardless of what happens in the market.

Variable mortgage rates usually don’t have a set rate, but rather a spread to the prime rate (ex: Prime – 1.00%). When the prime rate in Canada goes up, so will your mortgage rate by the same amount and vice versa. Most lenders will let you convert your variable rate mortgage to a fixed rate mortgage at any time, you will have to pay the fixed rate once you decide to switch.

It’s worth noting that banks offer a variable rate or adjustable rate mortgage and you should be aware of the differences. When prime rates move, a variable rate mortgage payment will stay the same (subject to trigger rates), but your amortization will adjust to shift more/less or your mortgage payment towards paying interest. With an adjustable rate mortgage, your amortization will remain the same and your mortgage payment will change as prime rates move.

Is prime rate the same as mortgage rate?

The prime rate is not the same as your mortgage rate. A prime rate is the base cost of borrowing from which lenders start to determine interest rates on mortgages, personal loans, credit loans or other financial products. In general, the prime rate mostly affects variable rate mortgages. Your mortgage rate is the interest rate you are expected to pay on any borrowed money.

What is the mortgage rate forecast for 2023?

To better determine the mortgage rate forecast, it’s important to take into account historical trends. During the great recession in 2008, the economy was able to get back on track after requiring bailouts and stimulus to keep running. There was very low GDP growth for over 10 years after the 2008 recession, which resulted in low interest rates. From 2020 – 2023 there was a similar economic bailout due to COVID. However, this time the stimulus was far greater, with over 40% of dollars ever created between 2020 – 2022. As a result of the shutdown of the economy and supply chains, difficulty restarting these supply chains as well as the war in Ukraine, inflation is significantly more as the economy stabilizes.

On Wednesday, April 12th, 2023, The Bank of Canada announced that it will maintain the key interest rate at 4.50% and will be continuing their pause on rate hikes for the near future while they look closely at the economy to determine future policy.

Key factors that signal where mortgage rates will go next include the strength of the Canadian economy in terms of real GDP, consumer price index (CPI), unemployment rate and bond yields, among others.

For the month of April, Ali Hussain, Head of Mortgage Advisory at Perch, anticipates fixed rates will decline, variable rates will remain the same as the Bank of Canada continues to pause further rate hikes. According to CREA, sales activity rose 2.3% month over month, however the number of newly listed homes dropped 7.9% in February. “The similarities between 2023 and the recovery year of 2019 continued to emerge in February, with sales up, the market tightening, and month-over-month price declines getting smaller,” said Shaun Cathcart, CREA’s Senior Economist. We expect the coming months to be more active as buyers enter the market with lesser resale inventory on the horizon.

By the end of 2023, Ali Hussin, Head of Mortgage Advisory at Perch, forecasts fixed rates reaching low fours on five-year terms. He also anticipates the Bank of Canada to lower the overnight lending rate in the second half of 2023, causing lower variable rates.

  • With rates possibly peaking and the housing market down across the board in cities, now might be the time to jump on the homeownership bandwagon if you’ve been waiting on the sidelines.
  • When interest rates eventually come down again it’s likely the increased demand will bring the housing market back to where it was pre 2022. If you go with a variable rate you could have the best of both worlds when rates come back down, or you could play it safe and go with a fixed rate mortgage.
  • For adjustable rate mortgages (meaning your payments fluctuate as prime rates change), there is no change to your payment and you should expect some relief later this year as rates start to come back down.
  • For variable rate mortgages (meaning your payments don’t fluctuate as prime rates change) that are coming up for renewal, you may want to consider switching lenders to take advantage of lower payments that would potentially be coming your way for the next few years.

Variable Rates

Based on our latest insights, here is Perch’s forecast for 5-year variable rate mortgages in Canada from 2023 to 2028. In February, we saw optimistic economic data that have delayed the pace of anticipated rate cuts from the Bank of Canada. The long term interest rate outlook has reverted back to 4.00% as of our March outlook and a steadier decline in inflation than initially projected in January has led to a modest rise in fixed mortgage rates.

Fixed Rates

5-year bond yields are expected to also come down around 0.75%, which should be reflected in 5-year fixed rates as well.

Are adjustable rate mortgages common?

According to the Bank of Canada, as of Q4 2021, about 35% of Canada owns real estate with a mortgage. Of that group, the majority have a fixed mortgage. With variable rate mortgage holders, a minority have variable payments, roughly 2% of all Canadians. So no, adjustable rate mortgages are not that common.

Canada Interest Rate Forecast | Perch (1)source: Bank of Canada (BoC)

What is a bond yield?

A bond creates value over its lifetime until it matures, and the yield is a measure of how much value the bond creates. Government bonds help the government pay for its operations and pay off its debt. It is also known as a ‘security’ which means the buyer is lending the government money, and is guaranteed they will be paid back the face value of the bond when it matures. In Canada, bonds are considered to be very secure investments. The buyer also receives interest payments on their loans to the government for the duration of the bond’s term.

Yield is a bond’s return and is calculated as a coupon yield or a yield to maturity (YTM).
A coupon yield is a set percentage of the bond’s face value paid at regular intervals such as 15% a year. If you bought a bond for $1,000 with a 15% coupon, you would be paid $150 every year until that bond matures. A bond’s YTM is the sum of all the interest payments you would receive throughout the term of the bond. This also includes any gains or losses depending on if you bought the bond at a discount or a premium.

If you decide to sell a bond, the price you paid for it initially might have changed. If you bought a bond at face value for $1,000 and is worth $500 when you sell, it would be considered selling at a discount. If the bond has increased to $1,500, this would be considered selling at a premium. Regardless of the price of the bond when selling, the coupon percentage remains the same. The seller would still receive $150 a year based on the original value of the bond.

What determines bond yield prices?

The Government of Canada 5 year Bond Yield factors in all known economic data very frequently. When the market and bond traders believe that the Central Bank of Canada will increase rates, the Bond Yield increases and vice versa. In other words, the Bond yield is priced in anticipation of where the Central Bank of Canada rates will move. The Central Bank of Canada makes its rate decisions, based on the status of the economy. Currently for the Canada 5-Year Bond Yield, Canadian bonds are priced in anticipation of a further 0.75% increase in Central Bank of Canada rates in 2022 and early 2023.

How are bond yields related to fixed mortgage rates?

Banks will originate mortgages and then pool a bunch of them into what is called a mortgage backed security (MBS) to be sold off to investors (someone like a pension fund for example) who collect a yield on the MBS. The pension fund could invest in other fixed income investments, so mortgage rates rise as a result to entice investors to keep buying the MBS. lBond yields and mortgage rates move in the same direction.

How will bond yields affect my mortgage interest rate in 2023?

During the month of March, stress cracks in the foundation of international banks caused a rush into safer assets, which resulted in lower 5 year bond yields at home and abroad. March saw yields drop by approximately 90 basis points in the span of two weeks, the bond market is pricing in a higher risk of a recession.

The 5 year GoC bond yield dropped 0.139 points on Friday, March 10th, followed by a 0.38 drop on March 13th, leaving bond yields at 2.898%. This is the largest move in over 25 years for Canada. The 0.57 point decrease is about half of what was taken off in the past year, however the yield is still a little more than a point higher than last year. There were similar drops for different terms such as 2, 4, and 10 year bond yields. This could mean good news for those with fixed rate mortgages, as this could potentially result in lower mortgage rates if these hold up.

5-year bond yields bottomed at 2.79% mid January, yields not seen since August of 2022, with the 5-year bond yield hovering around 3%, lenders will be incentivized to decrease their 3 year and 5 year fixed rates to mid 4% throughout the month of February. We will finally begin seeing lower rates on short term fixed rates in 2023 as well.

For homeowners that are coming up for renewal, rates are beginning to drop. It would be wise to renew into a one year term until rates begin to decrease in the next year. For homeowners that would like to see the benefit of switching lenders and breaking their mortgage early, Perch automatically calculates the net benefit once you input your existing property and mortgage details in your Perch portfolio.

What are the interest rate predictions from the banks?

Director of Canada Economics, Tony Stillo, expects the Bank of Canada will hold the policy interest rate steady at 4.50% through 2023, before gradually easing rates to a neutral level beginning sometime in early 2024. He also suggests that the Bank of Canada will not consider a rate increase unless there is overwhelming economic evidence of a heated economy.

CIBC

CIBC economist, Avery Shenfeld, suggests that the Bank of Canada will steer clear of signaling that rate cuts are around the corner, stating “for that, we’ll really need to see some genuinely bad news, in the form of higher unemployment and a drop in output for a quarter or two”.

Their Canadian yield targets for June, which were essentially reached early this month, now look too high, as they assumed the market would temporarily price-in a larger Fed overshoot. Their revised outlook has yields rising on a less dramatic track towards this summer, but maintains their 2024 levels, with Fed and Bank of Canada rate cuts that year.

RBC

RBC economists believe the most likely scenario is that the Bank of Canada will not need to hike interest rates further this year and their forecast continues to assume the Bank of Canada will be on hold until early 2024. Economists Nathan Janzen and Carrie Freestone say that inflation (and the broader economy) are still running too hot for the Bank of Canada to actively consider cutting interest rates but staying on the sidelines for now looks like an easy decision to make.

TD Canada

TD Bank senior economist James Orlando believes that the narrative for Canada is similar to that south of the border. Near-term spending is likely to grow at a modest rate amid resilient job market conditions. However, high inflation and high interest rates will increasingly take their toll on spending and hiring in 2023 and through 2024. Inflation has likely peaked in Canada and they expect further easing in price pressures in 2023 and 2024. This should allow the Bank of Canada to maintain the overnight rate at the current 4.5% level through 2023. Both short-term and long-term bond yields are likely to decline over 2023 as policy rate cuts become closer to being realized. TD economists assume the overnight rate is reduced back towards its neutral level starting at the beginning of 2024, with the rate reaching 2.25% by 2025.

Scotiabank

Derek Holt, vice president of capital markets economics says “there are definitely forward-looking risks to the outlook, but at least so far the Canadian job market and the Canadian economy remain highly resilient. This continues to counsel against expecting rate cuts anytime soon”.

BMO

BMO’s chief economist, Douglas Porter, says “the BoC is comfortably on hold for the time being with inflation slowing in line with its forecast. The Bank’s expectation that the economy will be in excess supply by the second half of the year opens the door to potential easing later this year if inflation continues to slow, but there’s still a lot of wood to chop on that front. In fact, the Governor explicitly stated in the press conference that market pricing of rate cuts later this year isn’t the most likely scenario. We continue to expect the Bank to remain on hold until the end of 2023 before rate cuts begin in earnest in 2024.”

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