To view the Mortgage Rate Forecast PDF, click here.
- Bank of Canada actions have pushed mortgage
rates to record lows
- Canadian economy bounced back in the third
quarter, but the second wave looms
- Bank of Canada on hold, but when will
quantitative easing end?
Mortgage Rate Outlook
Canadian mortgage rates were driven to a new
record low in the fourth quarter as the Bank
of Canada focused its program of quantitative
easing (QE) at the middle of the Canadian yield
curve. With the Bank buying $4 billion in 5- and
10-year bonds per week, the benchmark 5-year
Government of Canada bond fell to as low as
0.30 per cent and dragged 5-year fixed rates to
an average of 1.84 per cent.
Along with a massive expansion of its balance
sheet to facilitate QE, the Bank of Canada has
also reaffirmed its plans to keep its overnight
policy rate at 0.25 per cent until it sees slack in the
Canadian economy fully absorbed. Given current forecasts for economic growth, that may not occur until 2023, meaning these low rates will be around
for quite some time. There are, however, other
factors in the economy and financial markets that
may push mortgage rates marginally higher over
the next year.
Canadian 5-year bond yields jumped about 15
basis points on the announcement of a successful
vaccine as markets re-evaluated timelines for a
potential end to the COVID-19 pandemic and a full economic recovery. It remains to be seen whether
the impact of this brighter outlook will overcome the
dark winter of rising COVID-19 cases. However, as the
eventual recovery does kick into what we expect will be
high gear early next year, the speed and strength of that
recovery will dictate the eventual duration of the Bank
of Canada’s QE. A faster recovery will mean an earlier
end to QE and, as the Bank’s bond purchasing slows
and the need for the Government of Canada to finance
deficits grows, there will be some upward pressure on
government bond yields. As a result, while the prime
borrowing rate and variable mortgage rates will likely be
flat over the next year, we anticipate that 5-year fixed
rates may rise modestly by the middle of 2021.
Following a record contraction of the Canadian
economy in the first half of 2020, the third quarter saw
a vigorous rebound in economic growth. Real GDP grew
8.9 per cent, or 40.5 per cent on an annualized basis,
bringing the economy back to within 4 per cent of its
pre-COVID-19 level. The distressing second wave of
COVID-19 and the restrictions it has necessitated have
jeopardized the recovery that’s currently underway.
However, we still expect the economy to post positive
real GDP growth in the fourth quarter of 2020, though
there is the risk that a renewed fear of public spaces
combined with targeted restrictions will prompt a
modest retracing of output.
The ultimate economic impact of COVID-19 by the end
of 2020 will be a Canadian economy that is about 2 per
cent smaller by year-end. That said, promising results
from vaccine trials should lead to very strong growth in
2021 as pent-up spending floods back into the economy.
We expect Canadian real GDP will grow by an average of
4 per cent over the next two years.
Monetary Policy Outlook
The Bank of Canada is committed to holding its
overnight policy rate at 25 basis points until slack in the
economy is absorbed. The injury to Canadian output
caused by the pandemic suggests this will not occur until
2023. Even a relatively faster recovery would mean that
the output gap – the Bank of Canada’s primary measure
of slack in the economy – is not fully closed until near the
end of 2022.
The current size of the output gap, along with low
energy prices, is holding Canadian inflation well below
its target of 2 per cent. Total CPI inflation is trending
under 1 per cent while the Bank of Canada’s measures of
“core” inflation remain below target despite the massive
expansion of the Bank’s balance sheet necessary to
facilitate its QE program. The first stage of tighter
monetary policy from the Bank will be how and when it
decides to taper its bond purchases over the next year.
With a firm commitment to keeping the overnight rate
at its current level, we may start to see a divergence in
variable and fixed rates by early summer as fixed rates
creep marginally higher.
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