Apart from that, the Big 6 banks' rate predictions haven't changed much.
Below you'll find a summary of the latest year-end interest rate projections from each of Canada’s major banks. Use them only as a rough guide because economist rate outlooks have considerable margins of error.
Latest Overnight Rate Forecast
The Bank of Canada's overnight target has a direct impact on variable mortgage rates.
Bank 2011 2012
BMO 2.00
3.50
CIBC 2.00 2.25
NBC 2.00 2.75
RBC 2.00 3.00
Scotia 1.50 2.25
TD 2.00 3.00
Year-end Avg 2.00 2.75
Chg vs Today +1.00 +1.75
(All figures are rounded to the nearest 1/4 point increment.)
Latest 5-Year Government Bond Yield Forecast
Government bond yields drive 5-year fixed mortgage rates.
Bank 2011 2012
BMO 3.58 4.15
NBC 3.46 3.88
RBC 3.30 4.05
Scotia 2.75 3.00
TD 3.50 3.80
Year-end Avg 3.32 3.78
Chg vs Today +0.53 +0.99Variable-Rate Mortgage Forecast
If Canada's primary securities dealers are right, the next Bank of Canada rate increase will happen on July 19. Overnight index swap traders, who make huge bets on Bank of Canada moves, are pricing in a September 7 rate increase. (Source: Reuters)
Major economists now predict a 175 basis point boost to the overnight rate over the next 21 months. Their estimates, if accurate, imply a 4.75% prime rate by December 31, 2012. Prime rate is currently 3.00% and the 10-year average of prime is 4.40%.
Based on an 80-basis-point discount from prime, these forecasts suggest 5-year variable rates in the 3.95% range by year-end 2012. That's pretty close to today's 5-year fixed rates.
Fixed-Rate Mortgage Forecast
Major banks foresee 5-year bond yields climbing 99 basis points in the same 21-month timeframe. That would peg the 5-year yield at 3.78% by the end of next year. The 10-year average of the five-year yield is 3.66%.
Assuming a typical 120 basis point spread above yields, these forecasts suggest discounted 5-year fixed rates could rise to roughly 4.86% by year-end 2012.
Rate Forecasting In Perspective
The major banks spend millions to formulate accurate interest rate projections. Their economists utilize every data source, academic study, historical backtest, and analysis tool imaginable. Yet, try as they might, their forecasts are far from infallible.
Despite economists' notorious and continuous forecast revisions, long-term rate estimates still provide a useful reference point. Part of their value is in showing what might happen if the world unfolds without global crises and major economic disruptions.
With that reference point as a "base case," these forecasts can then be useful for creating amortization models based on future rate assumptions. The key is to incorporate a reasonable margin of error in those models—one that's big enough to account for things like hyper-growth/inflation or those aforementioned economic disruptions.
Other Things to Note: These forecasts are made by the banks and are subject to frequent change. This data is provided only for general interest. Always discuss your needs and risk tolerance with a mortgage professional before acting on any such information.
History has shown that it’s near impossible to accurately predict interest rates long-term so use these figures at your own risk. That said, while economist projections are often wrong, they are still one of the better sources of educated opinion on interest rates.
“Chg” = the expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All forecasts are based on the respective year-end, except BMO's.
Bank estimates are taken from the latest forecasts published on their respective websites. For banks reporting rate forecasts as averages for a quarter, we have averaged their Q4 and Q1 forecasts to estimate year-end figures. Overnight rate results are rounded to the nearest 1/4 point, in keeping with the Bank of Canada's standard rate setting increments.
Title: Canadian Interest Rate Forecast
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