Last Updated: May 31, 2023
For more information about the 2023 Bank of Canada rate announcement schedule, read more here.
Based on recent comments from Canada’s leading bank economists and key market indicators, it appears unlikely that interest rates will decrease in 2023. The annual inflation rate rose in April 2023 for the first time since peaking in June 2022.
Statistics Canada reported that Canada’s economy grew at an annualized rate of 3.1% in the first quarter of 2023, higher than the 2.5% forecast from StatsCan. Economists are now saying that these GDP figures raise the odds of further rate hikes from the Bank of Canada. Some economists say they wouldn’t be surprised if another rate hike happens in the June 7th meeting, while others think it’s wiser if the Bank of Canada waits for future data points on inflation and the economy before making decisions.
The interest rates in Canada will depend on various factors that are constantly changing which makes it difficult to predict where interest rates will go in 2023. However, it’s not looking like rates will go down anytime this year. As of the last interest rate announcement, the Bank of Canada 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. Alex Leduc, Principal Mortgage Broker and CEO of Perch, believes that rate cuts will start in Q1 2024 rather than Q4 2023. “The fallout from Silicon Valley Bank, Credit Suisse and other financial institutions proved to be largely contained with minimal contagion. Initially, markets were pricing in faster cuts if the central banks had to bring stability to the market, but since it’s already subdued, those expectations have gone away”.
The target inflation rate (2%) set by the Bank of Canada is a benchmark for price stability. Interest rate changes from the Bank will impact borrowing costs, spending and economic growth which will affect the inflation levels in Canada. When inflation is closer to healthier levels, this could give the Bank some room to lower interest rates. Although inflation continues to trend downwards, it’s still significantly far from 2%.
| 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% |
The majority of bank economists believe there will be no additional rate hikes for the remainder of the year, with expected rate cuts starting in 2024. However, a vocal minority are calling on the Bank of Canada to increase rates on June 7th to send a message to Canadians about its commitment to return inflation to the 2.5% target.
Scotiabank Vice-President and Head of Capital Markets Economics, Derek Holt, expects another interest rate increase is coming (Source: Financial Post). Holt believes the Bank of Canada needs to adopt the “crush it, killer mentality” and increase its benchmark rate in its ongoing fight against inflation—before it’s too late. The longer inflation remains elevated, the more likely it is that consumers and businesses will expect prices to continue rising, which in turn makes it more difficult to get prices back under control.
Jean-François Perrault, Chief Economist at Scotiabank, is explicitly calling for another rate hike, one he says is needed by the Bank of Canada to reiterate their position: “The risk of not doing enough, effectively implies that inflation doesn’t come down as much as we want, and that at the end of the day, you might need to do even more on the rate side later on to bring inflation down […] Twenty-five basis points doesn’t make a huge difference in anybody’s pockets, but it helps solidify the Bank of Canada’s message.” (Source: BNN Bloomberg) In his economic forecast released on May 18, 2023, Perrault suggested Bank of Canada Governor Tiff Macklem should “leave the door clearly open” for additional rate increases if needed.
RBC believes the key rate will remain unchanged for the rest of 2023. Claire Fan, an economist at RBC, suggests inflation pressures will continue to ease, with the Bank of Canada’s earlier rate hikes having had the desired effect of “weighing on economic growth.” (Source: Global News)
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 Chief Economist, Douglas Porter, released his forecast and analysis on May 19, 2023. In the report, he called for the Bank of Canada to keep rates steady at the current levels through the rest of the year. “A few analysts are now openly calling for the Bank to start hiking rates again as soon as the June 7 meeting. That would likely be a mistake, and a better option would be to at least await the May jobs and CPI data, not to mention an early look at Q2 GDP, for a more complete picture of how the economy is faring.”. 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:
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
The Canadian prime rate stays 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.
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.
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.
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.
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.
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.
source: Bank of Canada (BoC)
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.
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.
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.
Bond yields jump up in May 2023
As per Alex Leduc, CEO of Perch: Recent economic data is signaling that inflation may take longer to reduce, and the economic data shows few signs of slowing down too much, to the point where it would cause concern for the Bank of Canada. This is resulting in the market expecting rate cuts to start later than expected and to decline at a slower pace, which in turn drives up bond yields.
If you’re currently shopping around for a mortgage, your fixed rates would be 0.3-0.4 higher than a week ago, so make sure your pre-approval isn’t affected if it’s stale.
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.
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 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 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 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.
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’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.”
