Mortgage Rate Forecast Highlights:

• Stubborn inflation has rates rising again
• How much longer can the economy shake off the impact of high interest rates?
• The Bank of Canada is back on the move

Canadian bond markets dramatically changed course following the release of April’s inflation data. After trending essentially sideways since March, the five-year government of Canada bond yield jumped roughly 70bps, rising back to previous peak levels as markets reacted to higher-than-expected inflation by revising expectations upward for the path of Canadian monetary policy. Those expectations were further bolstered by stronger than forecasted first-quarter economic growth and a strong Canadian labour market. The new consensus appears to be that the Bank of Canada will have to raise rates further to slow the economy and bring inflation back to its 2 per cent target. 

While the Canadian yield curve remains deeply inverted, as it has been for the past ten months, the spread between three-month treasuries and ten-year bonds is at 160 basis points, the largest inversion since the early 1990s and historically predictive of recessionary conditions ahead. Should the economy slow as anticipated over the second half of 2023, five-year bond yields will likely return to below 3 per cent. However, the economy has been remarkably resilient in the face of higher interest rates. Consequently, mortgage rates will probably move higher this summer and stay higher than previously expected until inflation shows meaningful improvement in falling back to target.

As a result, we are forecasting the average five-year fixed mortgage rate to stay above 5 per cent this year, likely rising back to 5.3 per cent before eventually declining in the fourth quarter of 2023. Variable rates are forecast to rise to 6.9 per cent, factoring one more rate hike by the Bank of Canada in July. However, if the economy weakens as expected and inflation resumes its path toward 2 per cent, we may see rate cuts by the central bank early next year.