Over the past week, the Canadian 5-year bond yield has skyrocketed from 2.96% up to 3.28% this past Wednesday, before settling back down to 3.02% by Friday.
“In my year-end blog, one of my predictions was that rates are going to be pretty volatile through this year,” says rate expert Ryan Sims of TMG. “We’re only two weeks into the new year, but so far, that prediction’s looking pretty good.”
That volatility has been driven by fears of inflation south of the border, stronger-than-expected jobs data in Canada and ongoing political instability on both sides of the border. With a new American administration taking office next week threatening to impose inflationary domestic policies and high tariffs for trading partners like Canada, experts are understandably wary of making any predictions.
“The number one thing that influences interest rates in Canada is inflation in the United States,” Bruno Valko, VP of National Sales at RMG, told Canadian Mortgage Trends. “We have absolutely no idea what’s going to happen with an incoming President who is very unpredictable.”
Valko explains that some of President-elect Trump’s key campaign promises — including mass deportations, the elimination of taxes on tips, social security and overtime pay and tariffs on imported goods — would all negatively impact American inflation, and by extension, Canadian interest rates.
As a result, forecasts for the Bank of Canada’s terminal policy rate vary widely, with predictions ranging from 2%, as predicted by RBC, to 3%, as predicted by Scotiabank. National Bank, meanwhile, believes we could see Bank of Canada rate hikes before the end of next year.
Valko adds that even in more stable economic times, forecasters tend to get things wrong, which is why he warns against giving too much credence to any predictions at this moment.
“We were supposed to be in a recession in 2023, rates were supposed to plummet, and if you look at the disparity between RBC and Scotiabank, it shows how impossible it is to predict,” he says. “I’m not going to make any forecast, because on Monday we’ve got Trump coming to power, and he says he’s going to sign 100 executive orders, and nobody knows what the impact will be.”
Experts still think a January rate cut is likely
While long-term forecasts remain uncertain, some remain confident that a 25-bps rate cut is coming later this month. What happens after that, however, is unclear.
“Probably we’re going see them cut a quarter-point, but I think the train kind of stops at that station for at least a little while,” says Sims. “I think the Bank of Canada cuts less than consensus this year, because if they start getting too far offside of the U.S. Fed, the Canadian dollar plummeting is going to become a major problem; basically, it’s going to reignite inflation.”
Sims explains that while the Bank of Canada doesn’t usually factor the dollar’s value into its rate decisions, it does consider inflationary risks. As the Canadian dollar weakens against the U.S. dollar, rising costs on American imports make the currency a key factor in rate decisions.
“Cut baby cut, but don’t do another jumbo cut, because that projects panic, and you don’t want to go walking through a jungle full of lions with flop sweat pouring off your shoulders,” says rate expert Ron Butler. “You cut 25-bps and tell everyone you’re carefully monitoring, even if you fully expect to cut again.”
Where that leaves brokers and borrowers
With expectations of at least several more quarter-point rate cuts in the first half of the year, Butler said he’s seen a sharp rise in variable rate mortgages in recent months, which is the product he currently recommends.
“Variable has probably gone from 2% nine months ago to 35% today,” he says. “The great balance of probabilities is that the economy deteriorates, and accepting inflation is neutral—there’s no clear indication that it’s going to go up, there’s no clear indication that it’s going to go down—the only logical decision is to go variable.”
Sims tends to agree, but concedes that some clients prefer the certainty of a fixed rate in this unpredictable environment.
“The main advice from me is take the variable if it’s not going to keep you up at night,” he says, adding that there are some more unique circumstances under which that advice would change. “If somebody says, ‘I’m going to be selling my house in two years,’ then a 2-year fixed would probably make the most sense.”
Valko, however, is a bit more hesitant to recommend a variable rate to everyone, given the unpredictability of the moment.
“I would advise brokers not to guarantee an outcome,” he says. “With all the volatility of Donald Trump being President on Monday, how can anyone make a prediction on where rates are going to go in 2025?”
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Last modified: January 18, 2025
