mortgage rate forecast


Canadian mortgage rates have continued 2017’s upward trend. The five-year qualifying rate for insured mortgages bumped up 15 basis points to 5.14 per cent while discounted rates offered by lenders increased similarly to 3.39 per cent. The increases were driven by
the earlier than expected rate increase by the Bank of Canada in January. The Bank has now raised interest rates three times since last summer, with its key policy rate sitting at 1.25 per cent.

The Bank’s next move, and the impact on mortgage rates, hinges on how Canadian inflation evolves over the next two years. Our baseline forecast, which lines up similarly with the Bank of Canada’s, assumes the Canadian economy will return to its full employment level this year. That would mean inflation returning to the Bank’s 2 per cent target with the overnight target rate gradually rising to its neutral level of around 3 per cent over the next two
years. However, it is important to also examine mortgage rates under alternative scenarios for inflation and the economy. One scenario could see core inflation overshooting the Bank’s target as economic growth escalates above trend, putting extra pressure on wages and prices. In that scenario, the Bank would likely tighten rates much more aggressively. If inflation approaches the upper-end of the Bank’s 1 to 3 per cent range, we would expect
discounted mortgage rates to rise to about 4 per cent by the end of this year and to 4.5 per cent by 2019.  

Alternatively, it is possible inflation will undershoot the Bank’s target, as it has for the past several years, which would mean less urgency for tighter monetary policy. However, even with inflation undershooting the Bank’s target and falling to near the bottom of the Bank’s
range, it is likely long-term interest rates will still rise due to other factors, including tightening by the US Federal Reserve and a general upward bias in rates as they normalize closer to their long-term average. If inflation undershoots the Bank’s 2 per cent target, we expect that 5-year mortgage rates will be only 15 basis points higher by the end of 2018.

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