Canadian Interest Rate Forecast - Q2 2015
All six major forecasters tracked here are calling for an increase in Canadian interest rates in both 2015 and 2016:
- Interest Rates dropped sharply in the first quarter of 2015, but have risen marginally since;
- All major forecasters are currently calling for an increase in interest rates beginning in the early part of 2015, hitting an average of 2.05% by the end of 2016 – an increase of 109 basis points from the end of May;
- However, there is some disagreeance on the size of the increase, with a range of 85 basis points between forecasters by Q4 2016.
Canada’s economy is generally expected to underperform in the near term, as low oil prices dampen investment in oil & gas related infrastructure. This has widespread impacts on jobs and affects consumer and investor confidence, thereby delaying purchasing decisions and scaling back investments. A slower pace of growth will leave some slack in the economy, curtailing inflation and putting little upward pressure on interest rates in the near term. This is already evident in the economy's first quarter contraction - the largest since the recession. The Bank of Canada recently held their overnight rate steady following a 25 basis point decline to 0.75%. Most forecasters are calling for another reduction in the Bank of Canada’s overnight, with some disagreeance over the timing. The Bank will be closely monitoring the effects of their last interest rate reduction, which was meant to offset negative effects from reduced oil prices and provide some stimulus to the economy. With that in mind, the Bank will be keeping a particular eye on international exports, exchange rate fluctuations, employment growth, and developments in the oil & gas sector.
The larger than expected contraction in both Canadian and American Q1 GDP growth lends credence to the argument that the Bank of Canada will lower its overnight rate later this year. If they do, that would lower the prime rate and, thus, variable rate mortgages.
It should be noted that several of the forecasts presented here were released prior to Q1 GDP. It is expected that there will be some downward revisions present in the next iteration of this report.
Looking Ahead - Where Will Mortgage Rates Go?
As we said before, the Bank of Canada will be keeping a close eye on several important economic indicators that will influence their next decision. Economic activity in the US is among them, as it heavily influences exports. This is crucial, as the Bank of Canada is looking to non-energy exports to pick up the slack from the oil & gas sector.
All-in-all, it is likely that, in light of recent economic weakness, the Bank of Canada will cut rates this year, putting downward pressure on mortgage rates in Canada.