A real estate sign in Vaughan, Ont., in September, 2024.Paige Taylor White/The Canadian Press
While Canada’s economy is on track to rebound in the second quarter as April GDP data and early estimates for May came in positive, the Bank of Canada is still widely expected to continue to hold its key interest rate at 2.25 per cent at its next meeting on July 15.
Economic activity is expected to improve after a sluggish start to the year, but slow growth is anticipated amid persistent headwinds – such as uncertainty surrounding the United States-Mexico-Canada Agreement, which was not renewed on the July 1 deadline.
Bay Street economists broadly believe the central bank is likely to hold the rate for the rest of the year while financial markets are placing bets on a quarter-percentage-point hike, according to Bloomberg data.
Changes in the Bank of Canada’s policy interest rate lead to similar moves in short-term interest rates, including the prime rate – an anchor banks use to price variable-rate mortgages.
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Fixed-rate mortgages, however, are directly benchmarked to the government of Canada five-year bond rate. Yields ticked up Thursday at market open and reached 3.06 per cent midday.
The movement was a correction after the market was closed for Canada Day, according to Sarah Ying, head of FX strategy at CIBC Capital Markets.
While the Bank of Canada sets its own domestic policy rates to manage Canadian inflation, it cannot stray too far from the Federal Reserve without putting the loonie at risk.
When the Fed raises rates, it pushes up U.S. government bond yields, and Canadian yields swiftly follow suit because of strong cross-border economic ties.
“If the yields in the U.S. move a little higher, generally speaking, it drives the rest of the world with it,” Ms. Ying said.
Traders are expecting the Fed to raise interest rates by a quarter-point by the end of the year, and as soon as October.
This would push the benchmark rate from its current 3.50-per-cent to 3.75-per-cent range toward 4 per cent, while also pushing up Canadian bond yields, including the benchmark for fixed mortgage rates.
According to a Bank of Canada analytical note from 2018, U.S. macroeconomic news contributes to more than 25 per cent of the variation in Canadian bond yields, while Canadian macro news only contributes to roughly 10 per cent.
“There’s definitely a spillover between U.S. data and how our markets respond,” Ms. Ying said.
Mortgage rates are sourced by Ratehub.ca. For a comprehensive list of today’s mortgage rates for each term/type, visit ratehub.ca/best-mortgage-rates.
Ratehub.ca is a mortgage-rate comparison marketplace and mortgage brokerage. It helps millions of Canadians compare and obtain the best mortgage rates, credit cards, insurance, deposits and loan products.
Rates shown are the lowest available for each term/type and category (insured versus uninsured) as of market close on Thursday.
