- Bond markets expect very aggressive Bank of Canada
- Is Canada in a recession?
- Bank of Canada tightening aggressively now, only to cut rates in 2024?
In BCREA’s last Mortgage Rate Forecast, we anticipated Canadian 5-year fixed mortgage rates would reach 4 per cent later this year. Instead, rates have already sling-shotted to 4.69 per cent as elevated inflation continues to drive interest rate expectations.
Canadian bond markets – and Canadian mortgage rates in turn – have already priced in significant Bank of Canada tightening. The 2-year Canadian bond yield, a good indicator of where markets expect the overnight rate to be two years from now, is already well over 3 per cent. That is an indication that markets believe the Bank will have to be very aggressive in its current tightening cycle, raising the policy rate above the top end of the Bank’s estimate of its neutral rate.
A steep trajectory for the overnight rate implies that the 5-year fixed mortgage rate could reach the 5 per cent level for the first time since 2009 while variable mortgage rates may rise to as high as 4.5 per cent. With the stress test for both insured and uninsured borrowers, prospective homebuyers are currently being qualified at a rate of 6.49 per cent with a strong possibility of qualifying at 7 per cent soon, a rate that has not been a reality in the Canadian mortgage market since the early 2000s.
Given how aggressive markets expect the Bank of Canada to be, any good news on inflation, or any significant deterioration in the Canadian economy, could see a significant reversal in the most recent jump in Canadian bond yields. However, the baseline case for now is a Bank of Canada that is single-minded in its pursuit of lower inflation.
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Provided by: BCREA
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