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The Mortgage rate forecast is highlighting the fact that the relative calm in the mortgage markets contrasts with the unprecedented volatility in the bond market.  From just the second half of October to early November, Canadian bond yields experienced three of the top 25 most significant daily moves over the past 20 years.  Indeed, the bond market seems to be evaluating and re-evaluating the Bank of Canada’s overnight rate path with each data release and announcement.

Client Firs Mortgage Solutions Mortgage Rate ForecastInterestingly, even the still persistently high Canadian inflation in October, bond yields have fallen and are now at levels last seen in early October.

Despite the decline in bond yields from where they peaked in early October, we are only now seeing an adjustment to five-year fixed rates, as lenders are still waiting for a clear signal on the direction of their funding costs.

If five-year bond yields sustain the most recent decline, we may see five-year fixed mortgage rates head lower, even in the face of a still tightening Bank of Canada.  The same scenario played out in 2019, when the Bank was near the end of its tightening cycle and economic growth began to stall.

We expect that the average Canadian variable mortgage rate will rise to 6.35%  consistent with a 4.5% Bank of Canada overnight rate.  The forecast is for the Bank of Canada to begin lowering its policy rate next year, which will be passed through to variable rates by the end of 2023. Client First Mortgage Solutions Mortgage Rate Forecasts 2022 2023

Five-year fixed rates have likely peaked at their current average of 5.5%.  Assuming the recent decline in Canadian bond yields  is sustained, or even that yields fall further on an increasingly pessimistic outlook.  Fixed mortgage rates should begin falling in early 2023, ultimately ending the year around 5%.

Client First Mortgage Solutions Bond Market VolatilityEconomic Outlook

It is rare, outside of recessions or pandemic lockdowns, to see household spending fall quarter-over-quarter, and while one quarter does not make a trend, it is something to monitor as recession fears rise.

It is expected to see a sustained slowing of the economy as the Bank continues its tightening cycle, particularly in interest rate-sensitive sectors like housing.  There is an elevated risk that GDP may contract in 2023 as rate increases start to impact the broader economy.

Bank of Canada Outlook

After raising its overnight rate by 400 basis points this year, the Bank of Canada appears to be close to the end of this tightening cycle.   Given that the overnight rate is projected to rise to more than 100 basis points higher than the top end of the Bank’s estimate of neutral (2-3%), the question that remains is how long interest rates will remain a that elevated level.

Given weakening economic growth, falling gasoline and other commodity prices, and fading effects from pandemic driven supply chain problems, we could see a significant downward trajectory for inflation in 2023, which would provide the Bank with the necessary support to begin lowering its policy rate.

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