Canadian Interest Rate Forecast

After bursting out of the gates earlier this year, the economy is hobbling to the 2010 finish line.  With inflation well-contained, interest rate expectations are down across the board since the last rate forecast in August.

Rate Forecasting In Perspective

Mortgage-Rate-Forecast Major economists are paid well to tell us where interest rates are headed.  They have access to every data source, academic study, historical backtest, and analysis tool imaginable. While far from infallible, these forecasts serve as a point of reference when creating amortization models based on future rate assumptions.

Below you’ll find a summary of the latest year-end interest rate projections from each of Canada’s Big 5 banks. Use them only as a rough guide because rate outlooks have considerable margins of error.

Latest Overnight Rate Forecast

The Bank of Canada’s overnight target has a direct impact on variable mortgage rates.

Bank 2010 2011
BMO 1.00 2.25
CIBC 1.00 1.75
RBC 1.00 2.25
Scotia 1.00 1.75
TD 1.00 2.00
Year-end Avg 1.00 2.00
Chg vs Today 0.00 +1.00

(All figures rounded to the nearest 1/4 point increment.)

Latest 5-Year Government Bond Yield Forecast

Government bond yields drive 5-year fixed mortgage rates.

Bank 2010 2011
BMO 2.03 3.05
RBC 2.45 3.50
Scotia 1.85 2.50
TD 2.30 3.10
Year-end Avg 2.16 3.04
Chg vs Today +0.29 +1.17

(CIBC’s 5-year bond forecast was not available.)

Variable-Rate Mortgage Forecast

Most analysts now expect the Bank of Canada to remain on the sidelines until 2nd quarter 2011. On average, major economists now predict a 100 basis point increase in the overnight rate over the next 15 months.  Their outlooks, if accurate, imply a 4.00% prime rate by December 31, 2011. Prime rate is currently 3.00% and the 10-year average of prime is 4.50%.

Based on a 75-basis-point discount from prime, these forecasts suggests 5-year variable rates in the 3.25% range by year-end 2011.

Fixed-Rate Mortgage Forecast

Banks foresee 5-year bond yields climbing 117 basis points in the same 15-month timeframe.  That would put the 5-year yield at 3.41% by the end of next year.  The 10-year average of the five-year yield is 3.93%.

Assuming a typical 120 basis point spread above yields, these forecasts suggests deep-discounted 5-year fixed rates could rise to roughly 4.24% by year-end 2011.

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Things To Note: These forecasts are made by the banks and are subject to frequent change. This data is provided only for general interest.  Always discuss your needs and risk tolerance with a mortgage professional before acting on any information you read online.

History has shown that it’s near impossible to accurately predict interest rates long-term so use these figures at your own risk. That said, while economist projections are often wrong, they are still one of the better sources of educated opinion on interest rates.

“Chg” = the expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All forecasts are based on the respective year-end.

Not all contributors have published updates since CMT’s last rate forecast review. For banks providing mean quarterly overnight rate forecasts, we have averaged their Q4 and Q1 forecasts to estimate year-end figures for 2010 and 2011. Results are rounded to the nearest 1/4 point, in keeping with the Bank of Canada’s standard rate setting increments.

Data Sources: BMO, CIBC, RBC, Scotiabank, TD

Source: Canadian Mortgage Trends

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