Slow economic growth across Canada – predicted to rise only 1.1 per cent this year and 1.8 per cent in 2017 – will likely result the central bank keeping interest rates frozen for several years, according to a TD Bank economic forecast released September 26.
TD said in its report, “The Canadian economy is expected to grow by only 1.1% in 2016. Weak underlying economic momentum this year has been made worse by the Alberta wildfires. The rebuilding effort and increased government infrastructure spending are likely to spur growth to 1.8% in 2017.”
The bank predicted that the Bank of Canada will leave its rates frozen at one per cent until early 2019, and even then won’t see rapid growth.
“Slower trend economic growth will also restrain the level of interest rates,” said the report. “With excess capacity expected to be absorbed slowly over the next several years, the Bank of Canada is likely to leave rates at their current 1.00% level until early 2019. Even as rates move higher, they are likely to rise to just 1.25% by the end of the forecast horizon in 2020.”
That will keep the central bank’s overnight target rate at 0.5 per cent until 2019, according to TD, when it is forecast to rise to 0.8 per cent, and then to 1.15 per cent in 2020.
However, fixed-rate mortgages are not tied to the overnight rate, but to government bond yields – and TD forecasts that the five-year government bond yield will begin to rise steadily as of 2017. After closing out 2015 at 0.78 per cent, the five-year yield is forecast to close out 2016 at 0.65 per cent, rising to 0.85 per cent by the end of 2017, 1.2 per cent by the end of 2018, 1.5 in 2019 and 1.75 in 2020.