Canada Interest Rate Forecast 2023-2028
Last Updated: October 2, 2023
Interest rate forecast for 2023: 5.00%*
*Based on September 2023 Canadian economic data. There is a potential chance of 5.25% based on economic activity and inflation numbers.
- October 2023 Canada Mortgage Rate Forecast
- September 2023 Canada Mortgage Rate Forecast
- August 2023 Canada Mortgage Rate Forecast
Key Takeaways (updated October 2023)
- The prime rate in Canada as of September 6, 2023 is 7.20%. (last change: +0.00% on September 6, 2023)
- On Wednesday, September 6th, 2023, The Bank of Canada announced that it will be holding its rate, keeping the policy rate at 5.00%.
- According to the Statistics Canada report published on September 19, the Consumer Price Index rose 4.0% year over year in August, following a 3.3% increase in July. Higher gasoline prices were the main driver of Canada’s inflation rate in August. Excluding gasoline, the CPI rose 4.1% in August, matching the 4.1% increase in July.
- Statistics Canada reported that the Canadian unemployment rate was unchanged at 5.5%, following three consecutive monthly increases in May, June and July.
2023 Predictions (updated October 2023)
- For the month of October, we anticipate fixed rates will increase, and variable rates could also increase, should the Bank of Canada increase its key lending rate on October 25th.
- Perch predicts that the Bank of Canada will have a +0.25 increase in October.
- In 2024, it is expected that the Bank of Canada will cut rates by up to 2% and another 1% in 2025. This will result in lower payments for adjustable rate mortgage holders. We predict that key interest rate will hover around mid 4% in 2024 and mid 3% in 2025. TD economists predict the policy rate can reach 2.25% by 2025 as inflation slows and economic growth decelerates (Source: TD).
For more information about the 2023 Bank of Canada rate announcement schedule and upcoming 2024 announcement schedule, read more here.
Will Interest Rates in Canada Go Down in 2023?
Ali Hussin, Head of Mortgage Advisory at Perch says that October 25th, 2023, will mark the 7th meeting of The Bank of Canada this year, where they’ll publish their Interest rate announcement and Monetary Policy Report, with only one final meeting set for 2023 thereafter. There has been an increase of 75 basis points to the Bank of Canada’s overnight lending rate in 2023, a notable but small increase in comparison to 2022’s 400 basis point run. The Central Bank believes there’s now evidence pointing to slowing demand and increased probability of a recession, lead by slower consumption growth and a decline in housing activity, while still maintaining their hawkish and precautionary stance. Markets and Senior Economists largely believe there are no more rate hikes in the pipeline for Canadians, with inflation slated to continue to rise in the short term and resilient GDP and wage growth forecasts, the Bank of Canada might have one more rate hike in store.
Currently, the market anticipates that the Bank of Canada will delay rate cuts until the first half of 2025. In addition, the long-term interest rate has shifted upwards to approximately 5.00%, marking a 0.75% increase from its prior expected stabilization point. This shift reflects worries about the duration of inflation’s persistence and the timeline for returning it to the Bank’s 2.00% target.
In September, the Bank of Canada held its key rate at 5.00%. The Bank of Canada doesn’t expect inflation to reach its target of 2% until the middle of 2025, six months later than initially forecasted. The forecast for long-bond yields is also higher — the 30-year note is now expected to stay above three percent into early 2025.
Many economists, including David Macdonald, a senior economist with the Canadian Centre for Policy Alternative, argue that it will take time to see the full impacts of the previous rate hikes. Economists believe that rate increases have been driving up the interest Canadians pay on their mortgages, rent and other loans. The next Bank of Canada announcement is scheduled for October 25th, and the rate decision will be based on incoming economic data.
When is the next Bank of Canada rate increase and what can I expect?
The current market overnight interest rate forecast for the remainder of 2023 is:
- +0.25 on October 25, 2023
- No change December 6th, 2023
| Variable Rate Interest Forecast 2023 to 2028 (as of October 2023) | |
|---|---|
| Date | 5-year variable rates |
| 2023-09-30 | 6.05% |
| 2023-12-31 | 6.50% |
| 2024-06-30 | 6.62% |
| 2024-12-31 | 6.11% |
| 2025-06-30 | 5.83% |
| 2025-12-31 | 5.48% |
| 2026-06-30 | 5.17% |
| 2026-12-31 | 5.00% |
| 2027-06-30 | 4.73% |
| 2027-12-31 | 4.73% |
| 2028-06-30 | 4.73% |
| 2028-12-31 | 4.97% |
| 2029-06-30 | 4.87% |
| 2029-12-31 | 5.11% |
What is the interest rate forecast for 2023 in Canada? (updated September 2023)
Ali Hussin, Head of Mortgage Advisory at Perch, says that markets and senior economists do not anticipate further interest rate hikes for Canadians at the moment. However, with inflation slated to continue to rise in the short term and resilient GDP and wage growth forecasts, the Bank of Canada could have one more rate hike in store. For the month of October, we anticipate fixed rates will increase and variable rates could also increase, should the Bank of Canada increase its key lending rate on October 25th. Perch predicts a 0.25% increase in October and no change in December.
Following the Bank of Canada’s decision to pause interest rates on September 6th, a summary of Governing Council deliberations was released. This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision-making process. This stage takes place after members have received all staff briefings and recommendations. Governing Council’s policy decision-making meetings began on Thursday, August 31. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Sharon Kozicki, Nicolas Vincent and Rhys Mendes.
The Governing Council decided to keep the policy rate at 5.00%, believing it was the right decision to balance risks of over and under tightening. They acknowledged that economic data showed policy measures were working, but the economy would still feel some impact from past policy tightening. They emphasized their concern about slowing core inflation, their readiness to raise rates if necessary, and the need to keep tighter policy as a potential option until there’s convincing evidence of reduced inflationary pressures.
The Council also discussed the importance of clear communication, not wanting to raise expectations of lower rates soon. They will closely monitor data while balancing the risks of tightening or loosening monetary policy. Governing Council will continue to focus on the assessment of the dynamics of core inflation and the outlook for CPI inflation. They will focus on indicators like excess demand, inflation expectations, growth of labour costs, and company price-setting behaviour.
Additionally, Governing Council reviewed the Bank’s quantitative tightening program and agreed to continue the current policy of normalizing the balance sheet by allowing maturing bonds to roll off.
How does inflation affect future Bank of Canada interest rate changes?
According to the Statistics Canada report published on September 19, the Consumer Price Index rose 4.0% year over year in August, following a 3.3% increase in July. Higher gasoline prices were the main driver of Canada’s inflation rate in August. Excluding gasoline, the CPI rose 4.1% in August, matching the 4.1% increase in July. Economists had anticipated an uptick in inflation, and it is expected to persist in the coming months. However, on a monthly basis, August saw slower price increases, attributed to reduced costs for travel tours and air transportation. Grocery prices also rose at a slower annual pace, increasing 6.9% year-on-year compared to 8.5% the previous month, with a slight 0.4% decrease between July and August.
Many Canadian families have been affected by rising grocery prices, prompting discussions between Industry Minister Francois-Philippe Champagne and grocery chain executives on stabilizing prices. The Bank of Canada, which recently maintained its key interest rate amid a slowing economy, will be monitoring inflation numbers closely. However, it expects inflation to remain high and possibly rise in the short term, as indicated by the latest inflation figures.
The next interest rate announcement from the Bank of Canada is scheduled for October 25th.
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Alex Leduc
Alex Leduc is Founder and CEO at Perch. Prior to starting Perch, he worked in the real estate sector for 8 years in corporate finance, strategy and analytics roles. He is currently a Technical Advisory Committee Member of the Financial Services Regulatory Authority of Ontario (FSRA) and Co-Chair of the Canadian Lenders Association Mortgage Roundtable. Alex is a graduate of Ivey Business School from Western University and a CFA Charterholder. LinkedIn
What is the Canadian prime rate?
The Canadian prime rate increased by 0.25% to 7.20% effective September 6, 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.
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 interest rate forecast for 2023 in Canada?
On September 6th, the Bank of Canada announced a rate hold, keeping the interest rate at 5.00%.
Canada’s employment rose by 40,000 jobs in August, following a contraction of 6,400 jobs in July. While the Job market added more than double what was expected by Senior Economists, Statistics Canada’s report highlights that the increase in employment was outpaced by a burst in population growth (+103,000). Canada’s continued increase in newcomers has been the biggest prop up to our job market, this has essentially stalled the unemployment rate, which remained unchanged in August at 5.5%, following three consecutive increases.
Job vacancies continued to decline, by 55,500 in the second quarter, marking an entire year of decline. This quarter, there were 1.4 unemployed persons for every job vacancy in Canada, an increase (0.1%) from the previous quarter and a further increase (0.3%) from the second quarter of 2022, a further sign indicating the labour market tightness has eased, which could reduce upward pressure on wage growth.
The current focus for the Bank of Canada is bringing inflation back in line with the targeted 2%. The Bank of Canada is anticipated to cut rates by up to 2% over 2024 and another 1% over 2025. In the short term, we’re predicting the Bank of Canada will hold the policy rate steady at 5.00% to the end of 2023.
The market is now expecting that the Bank of Canada won’t start cutting rates until the first half of 2025. In addition, the long term rate has migrated upwards to around 5.00%, a 0.75% increase from where it was previously expected to stabilize. This reflects growing concerns over the persistence of inflation and how long it will take to reign it back into the Bank’s target of 2.00%.
For the Canada interest rate forecast, Alex Leduc, Principal Mortgage Broker and CEO of Perch predicts that there will be an increase of 0.25% in October and no change in December.
What are the interest rate predictions from the banks?
CIBC
CIBC economist Avery Shenfeld says “Don’t expect Governor Macklem to formally declare that rates have definitely peaked. He’ll need to see more disinflationary momentum for that, and it could be some months before we’ll have enough labour market slack for the Bank to be comfortable in stating that rates are high enough to do the job”. After a rate hold on September 6th, he expects that the balance of risk calculation will ultimately clarify that rates have in fact peaked for this cycle.
CIBC economists also say that The Canadian economy is currently facing challenges due to higher interest rates, resulting in a slight contraction in GDP in Q2. The outlook for the next three quarters is also expected to be weak. However, there is a possibility of avoiding a deep recession if interest rates are gradually reduced in 2024, especially before the potential risks from mortgage refinancing in 2025 and 2026. Additionally, the easing of inflation and its expected move closer to the 2% target in the first half of 2024 provides hope for a relatively soft landing.
RBC
RBC economists suggest that despite a noticeable global economic slowdown and concerns about Canada’s GDP declining by 0.2% in Q2, North America’s central banks, including the Bank of Canada, are unlikely to rush into interest rate cuts. While some factors behind the Q2 output drop, like wildfires and a federal worker strike, are deemed temporary, there are signs that a long-anticipated mild economic downturn might already be underway. Canadian GDP per person has declined for four consecutive quarters, and economic growth seems weak relative to a growing population. The Bank of Canada relies on closely data and is willing to increase interest rates if needed to achieve the 2% inflation target. There are upcoming labour market and inflation reports before the next decision in October. RBC anticipates that the overnight rate will remain unchanged for the rest of the year.
ScotiaBank
Derek Holt, vice president of capital markets economics at Scotiabank believes that rate hikes aren’t done. He is skeptical about the consensus views in the financial industry. He believes that competitors are too confident in their statements, such as claiming that rate hikes are over and inflation is transitory. Holt disagrees with these views, citing evidence of rising inflation and the potential for higher policy rates in the future. He also emphasizes that the current economic environment is unique and presents ongoing risks.
TD Canada
TD Bank senior economist James Orlando says Canadian investors are closely monitoring the U.S. Consumer Price Index as a potential indicator for Canada’s upcoming CPI release, considering the Bank of Canada’s cautious stance due to sticky inflation. Expectations of another CPI increase are contributing to government yields and mortgage rates stabilizing at higher levels. Despite the Bank of Canada’s rate hikes, inflation in Canada has been slow to react, and recent economic data, such as August real estate figures showing declining sales activity and prices, suggests a deceleration in Canadian economic momentum.
While there has been a clear slowing in spending, employment, and the real estate market, the better financial position of Canadians and stubbornness of inflation make the Bank of Canada’s job more challenging. TD doesn’t think the Bank needs to raise rates again this year, however, the Bank will likely keep the door open in case economic data surprises again to the upside.
BMO
BMO economist Douglas Porter says that the rate hold on September 6th was “no surprise, as markets and analysts were leaning heavily in the no-move direction”. The Bank of Canada has left the door open to the possibility of more hikes, but unless theer is a significant rebound in growth in Q3, which is doubtful, it is likely that the Bank is finished with rate increases. Porter says ”the softer growth backdrop will bring inflation back to 2% over time in our view and in the Bank of Canada’s models, even if the short-term CPI outlook is much more problematic. Holding rates steady at the next meeting will require some nerve as the next two CPI reports could see headline inflation approach 4% (the next one is due Sep/19), and will likely require still-chilly growth and some calming in core inflation”.
According to BMO senior economist Robert Kavcic, the recent pause in interest rate hikes by the Bank of Canada may not lead to another bounce in the housing market as it did earlier in the year. Kavcic cites several reasons for this caution. First, sellers are returning to the market, increasing the supply of homes for sale. New listings have surged back to historic norms, up 5.5% in August compared to the previous year. Additionally, there is a record number of homes under construction that will soon hit the market. Pressure to sell may also mount as more mortgages come up for renewal, with concerns about households’ ability to service their debt at higher interest rates, with some facing payment increases of up to 40%. Unlike in the spring, there is no expectation of mortgage rate relief, as yields remain high, and the Bank’s hawkish stance is preventing the market from rallying. The economy has also shown signs of weakening, with job market indicators less favourable than before.
