Mortgage Rate Forecast Canada 2024 – 2025

The next Bank of Canada interest rate announcement is on:

Wednesday, June 5, 2024

**Follow us on X(Twitter) HERE for regular interest rate and mortgage rate updates**

Historical context: Mortgage rates in Canada are forecasted to gravitate towards historical lows for the long term of 5 – 10 years.

To help determine mortgage rate forecast, one of the best perspectives we have available is a historical one.

During the great recession of 2008, the financial system and economy as a whole required bailouts and stimulus as never before seen, just to keep running. Thankfully, the stimulus did its job, and the economy rebounded and got back on track. However, between 2008 – 2019, for over 10 years, there was very low or stagnant GDP growth, and interest rates remained low accordingly. 

During the ecovid pandemic, in 2020 – 2022, we witnessed a similar massive economic bailout. This time the stimulus was far greater, with over 40% of dollars ever created between 2020 – 2022. 

However, in part due to a literal shutdown of the economy and of supply chains at one point and difficulty rebooting these supply chains, combined with excess consumer demand from pandemic savings, there is much more inflation as the economy stabilizes.

This inflationary difference will be discussed in more detail below. However, the main point here is that historically, when a massive new government and private debt are layered upon already massive debt, this can perpetuate dependence on yet ever cheaper debt to stimulate the economy long term. It can lead to long term economic stagnation and, importantly, to a ‘magnifying effect’ of increased rates. 

More specifically, with 5 times more debt in the economy today, adjusted to inflation, than in the 1980s and early 90s, a single 0.25% rate increase makes an approximately 5 times bigger impact than it did when debt levels were a fraction of current levels. Accordingly, there is significant long term pressure for rates to remain low. 

From another historical perspective, when rates increased in the 1980s from a base point of 10% to a 20% high point, this represented a 2x rate increase. However, a rate increase in 2022 – 2023 from a base point 0.25% to 5% represents a 20x rate increase, which will have a much greater shock to the economy.

Finally, the ‘neutral rate‘ or ‘target rate’ at the Central Bank of Canada, which is the rate seen as neither repressing nor stimulating the economy, is currently 2.5% – 3%. Given this, we may have 2% of Central Bank rate decreases in store (5% current down to 3%), and this, too, infers fixed and variable rates to stabilize in the mid-high 3% range.

As of April 2024, the market consensus on the mortgage rate forecast in Canada is for the Central Bank to hold the prime rate at 5% at its April 10, 2024 meeting and cut rates by 0.25% at its July 24 meeting. 

The main tool we have when reading the current mortgage rate market is the Government of Canada Bond Yield. The Canadian bond is a government debt security that pays a return to an investor. The ‘%’ based return is called the ‘yield’ and is considered one of the safest investments because the Government would have to go bankrupt for it not to pay its investors. 

The Government of Canada 5 year Bond Yield factors in all known economic data on a day to day, and even a minute to minute basis. Simply put – when the market/ bond traders think that the Central Bank of Canada will increase rates, the Bond Yield increases. When the Bond market thinks the Central Bank rate will decrease, then the yield drops. In other words, the Bond yield trades or 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 how it sees the economy performing.

Currently, as of April, 2024, as seen in the Yield chart below, the Canadian Bonds are pricing in the first Bank of Canada rate cut in July 2024.

As can be seen, over the past 6 months, the Bond Yield has generally been decreasing. However in the past month this downward trend is on pause and the Bond Yields have even notched higher. This shows us that the financial markets are pricing in declining Real, per capita GDP in Canada, slowing inflation, and a moderating jobs market. However the timing and speed of when this happens are being pushed out slightly.

Ultimately, the Bank of Canada is determined to get the job done by cooling the economy enough to bring inflation squarely into the 2% range: Inflation is currently in the low 3% range, flirting with the high 2% range. Given this, we expect a broader trend of continued downward pressure on the bond yield/ fixed mortgage rates. There will continue to be some volatility/ swings with fixed mortgage rates over the coming weeks and months – the trend in fixed rates will not likely be in a straight line. But ultimately there should be a downward trend over 2024 as we approach a Bank of Canada Interest Rate cut, even if this is to occur later in the year.

Economic slowdown, lower inflation and lower Bond Yields. What does this mean for mortgage interest rates?

With lower spending comes a slowing economy, lower inflation, and eventually, lower mortgage interest rates.

Current high rates will lead to lower rates – by design.

As of April 2024, the Canadian economy is on the brink of recession, with only population growth and government stimulus keeping Canada out of recession at this point.

However, if we look at GDP per capita, or Canadas economy divided by the population size, Canada is well into a recession. More specifically, given this per capita GDP measure, there has been a year and a half of economic decline. Given this, Canada has seen no Real GDP growth ( Real GDP is economic growth removing inflation effects) since March 2018. In other words, that’s over 6 years of economic growth erased, again, excluding effects of inflation and on a per capita basis.

As consumer demand drops for goods and supply chains improve, prices of economic inputs such as copper, steel, silver, lumber, microchips, shipping costs and many other commodities have fallen drastically. These trends are very anti-inflationary. However, food costs and housing costs continue to be inflationary. With a slowing economy,  these more inflationary areas of the economy have been cooling off.

It is known in economics and recently mentioned by the Central Bank of Canada that it takes 12-24 months for a single interest rate hike to ‘trickle through’ or have a full effect on slowing an economy. While the first small 0.25% interest rate hike in Canada happened in March 2022, as of March 2024, we have only started to see the full effects of the rate hikes of 2022.

As 2024 pushes onwards, we will likely see the effects of last year’s increases build momentum.

So it is important to keep in perspective that:

(1) The previous rate hikes we have seen have not had their full effect on slowing the economy, and we are already seeing a recession on the horizon.

(2) It is a matter of how long Canada can withstand such high rates before more significant negative economic impact.

Accordingly, the question is now focused on how long these high rates will remain.

As of April 2024, given this exceedingly weak ‘behind the curtains’ economic performance in Canada, the financial markets think this will take 3 more months before rates are cut.

However, the most clear answer we have from the Central Bank of Canada, is that interest rates will remain at current levels until inflation is in the 2% range. At this point, as indicated by the Central Bank, the rate cutting cycle can begin.

Financial Markets and the Central Bank of Canada more aligned in their thinking

The Bank of Canada stated in its February 2024 meeting, that it believes inflation will take well into the summer before inflation drops firmly into the 2% range. This is in line with what the financial markets are currently projecting for a July rate cut. Based on what the Central Bank itself is indicating, without directly saying this, there would not be any rate cuts until July 2024 at the earliest.

Although the Central Bank is still not providing specific guidance for a rate cut, this is the closest information we have from them. Also, Tiff Macklem, Governor of the Central Bank, has said loosely that he thinks rate cuts will happen in 2024.

It should be noted that the Bank of Canada often misses the mark with their projections. However in early 2024, it appears that inflation and economic activity, particularly in the US, is not quite ready for a rate cut. In our opinion, in this volatile economic environment, its best to err on the side of caution, or in this case the first rate cut in the Fall.

So, what does this mean for mortgage rates?

What goes up to slow the economy will eventually come down to stimulate the economy.

The Central Bank of Canada (and the Federal Reserve in the USA) is determined to fight inflation, which is why they are seen as slamming the breaks on the economy as a whole. There is no doubt this, unfortunately, will be painful for many. However, low inflation is needed on a foundational level to enjoy another long-term run of low interest rates.

Eventually, the Central Banks will begin cutting to start increasing Real economic productivity again. This means lower mortgage interest rates.

Historically, after the Central Bank has reached its peak or ‘terminal rate’,  it takes on average 6 months for the Central Bank to start lowering rates again. However given the stickiness of current inflation, instead of increasing rates further, the Central Bank is deciding to hold rates for longer – perhaps a year or more since the last rate hike in July 2023.

Its not a matter of if the Bank of Canada will cut rates, its a matter of when.

It should also be noted that, Canada generally needs to work in step with the US economy and their Fed rates. Otherwise, the Canadian dollar could sink substantially, which can cause inflation. In other words, even though Canada could enter technical recession before the US, the Central Bank of Canada may hold out a bit longer to drop the overnight rate, until a US recession is imminent.

While the variable rate mortgage is directly affected by the Central Bank decisions, we will likely see fixed rates generally trend lower throughout 2024, but not in a straight line as financial markets adjust their projections for the first cut. 

Rates will not normalize at the lowest levels seen during covid. However, as fixed mortgage rates generally remain in a restrictive 5% range, the expectation is that rate normalization may occur into the mid-high ‘neutral rate’ range or in the high 3% – low 4% range for mortgage rates.

The CIBC Capital Markets projection from April 2022, seen just below, illustrates a good representation of this forecasted rate trend. However, given stubborn inflation, the Central Bank rate peak will clearly be higher than in the numbers indicated in the chart:

Major Bank Prime Interest Rates Canada

Central Bank of Canada Prime Rate

5%