Rate increase forecasts intensify, but will higher rates remain for long?

While fixed mortgage rates keep going up, variable-rate borrowers are getting ready for their own hikes, as the central bank is expected to raise its key lending rate by 0.50% this week.

All of Canada’s Big 6 banks now predict such a decision from the Bank of Canada. It will raise the rate to 1.00%, so the Prime rate will grow to 3.20%, as a result.

In March, the BoC raised its overnight rate by 0.25%, and if it decides to make a half per cent increase, it will be the first time since 2009. Moreover, certain economists predict one more 0.50% rate increase in June, and others believe we’ll face a more gradual tightening to a 2.00% overnight rate by the end of this year.

At the same time, bond markets expect the overnight rate to go up even higher – to 2.50% by year-end.

“Although Canada’s inflation and wage pressures are more subdued in comparison to their U.S. counterparts, the risks still remain strong, and the need for a rate increase in Canada is just as pressing,” – TD economists noted. “Just like with the Fed, the BoC is coming from behind the inflation curve, creating stronger urgency to anchor expectations.”

Nevertheless, not everyone is sure these aggressive forecasts will come true.

“Now, the market is pricing in a fast hiking trajectory, with both central banks expected to reach 85% of their respective terminal rates during the next 12 months. In our opinion, this is too fast,” – wrote CIBC economists Benjamin Tal and Katherine Judge.

Today, average deep-discount uninsured 5-year fixed rates are about 4.00%. As fixed mortgage rates may exceed 4%, and variable rates expected to follow and reduce the spread in the nearest future, some are wondering whether higher rates will remain for long or if it’s just a temporary hike.

“As a rule, when the tightening cycle begins, central bankers don’t know for sure where the neutral rate lies, but they know it when they see it,” – CIBC economists explained. “An economic slowdown threatening to take the economy away from a full employment, or a decline in inflation to below target, could signal that rates already exceed the neutral level.”

The main question is, how likely is a future recession, which could make the BoC start reducing rates again. Certain indicators are already pointing to a higher risk of a possible downturn on the horizon and that means variable rate holders might see their rates to go down before their 5 years term is up. Please talk to your professional mortgage broker to develop a strategy that fits your budget and risk tolerance.