May 5, 2010, 10:02 am

Canadian Interest Rate Forecast

by: The Financial Blogger    Category: Investment, Market and Risk,Personal Finance,Properties
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Should I lock in my mortgage rate for a fixed term while they are still relatively low? Should I stick with a variable interest rate since they are still at all time lows? Are we going back to interest rates as high as those in the 80s? These are the questions on the lips of most people these days!

I attended two Economic reviews last week and they were talking about the Canadian interest rate forecast for 2010 – 2011. Why would they not provide interest rate forecasts for the next 5 years? Because it’s like forecasting the NHL standings for the next 5 years, do you really think you it’s possible? As you can see in my previous post about the Canadian interest rate forecast for 2010, most economists can’t agree on the pace of the increases of interest rates.

So today I am offering a little bit more about what will happen with Canadian interest rates for the rest of 2010 and 2011:

Before making any forecast, let’s take a look at the inflation forecast

The variable interest rate is heavily influenced by the Bank of Canada. In order to make their decision, they meet 10 times per year, look at the overall economy, imports, exports, job creation and several other economic indicators. However, one of the Bank’s priorities is to contain the rate of inflation.

When they increase the interest rate, inflation should remain stable or decrease. When they decrease the interest rate, it tends to stimulate the economy and resulting in rising inflation later on. The goal is to keep the inflation rate between 1 and 3% with an “ideal” inflation rate of 2% (this is where we are at right now).

There are currently 2 major factors that limit inflation going further: the Canadian Dollar strength and the high rate of unemployment (8.2%) which is limiting the consumer spending. However, we all know that over the next 6 months, a move on the Canadian interest rate will be necessary to maintain the inflation at an acceptable level.

Canadian interest rate forecast for 2010-2011

I’ll make my own interest rate forecast (just for fun ;-). Based on what I know, and what I have heard/read from different economists, here are my interest rate predictions:

#1 The Canadian interest rate will increase over this summer (probably starting in June, duh!).

#2 The Bank of Canada will increase the interest rate at a rate of 25 to 50 basis points at a time. They won’t be rising the interest rate by 3% annually.

#3 I think the variable rate will reach 3% by December 2010 and something like 4.5% by December 2011 (all right, this one is really a blind forecast 😉 but, what if I’m right? Hehehe!).

What to do with all the Canadian interest rate forecasts you read about?

You will probably read several Canadian interest rate forecasts written by bloggers, journalists and economists. We will all agree on one point: Interest rates will go up for the next 2 years.

However, I don’t think that the interest rate will go up that much since the US won’t touch their interest rate until 2011 and if we push it too high on the northern frontier, we will slow down our economy to their pace…

If you have a variable rate, I would keep it (this is what I do anyways!) and if you have a fixed rate, I hope you have a good one because the era of 3.70% for a 5 years interest rate is already over 😉

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I’m in the process of negotiating a variable rate. When I started talking to the bank (we’re building a house), the best they would offer is Prime. Our current house is at prime minus one. So, over time, I have gotten them to prime minus .15, then minus .4. Now I think I’m about to get to minus 0.5. I’m wondering, how are other people doing in these negotiations…

Good post Mike. I too, believe mortgage rates are on the rise, and the days of 3% borrowing costs over 5 years are coming to an end – likely never to be seen in our lifetime. Recall we’re already at 40+ year historical lows…

Those people who are actively paying down their mortgages are going to be rewarded big-time in another 5,10 or even 15 years. I subscribe to the theory that “normal” borrowing rates will return to about 6 or 7%. Exactly how fast it hits that mark, I don’t know, but it HAS TO BE coming. Overwise, the Canadian household debt load is going to reach dire levels from which there is no, pardon the pun, return.

by: The Financial Blogger | May 6th, 2010 (4:33 am)

@ Sean, if you can get Prime – 0.50% right now, I can tell you that you are making a hell of a deal (and I work in a bank 😉 ). This is a very low rate, I don’t think you’ll be able to get under this right now… congrats!

@ Financial Cents,
be careful about “it has to be”…. in Japan, they have near 0 interest rate for the past 15 years (if it’s not 20!). I don’t think it’s going to happen, but you never know 😉

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I’m also struggling with whether to accept a prime -0.60% rate or a fixed rate which I’ve had held for about 60 days at 3.5% for 5 years. From all the predictions out there, the variable rate is probably better for the next 18 months. After that, the 3.5% is likely a better bet. Any advice?

by: The Financial Blogger | May 21st, 2010 (5:57 am)

@ Dave, Prime-0.60% is 1.65%. This is roughly 2% below your 5 years rate. We don’t know what is going to happen in 18 months (who would have thought that Greece would shake the market like this 2 years ago?).

I would go with the variable rate… but that’s only my opinion 😉

Thanks…. I’m leaning toward the variable too. I crunched the numbers and made some assumptions about rates — the savings associated with the variable (especially after factoring in that at the lower interest rate, more of the payment goes toward principal) are quite significant. At this point, I’m probably going to just stick with the variable and have the bank base my payments on a 3.5% rate so I can fully maximize my payments until the rates catch up … appreciate the advice.

This is actually what I suggest my clients! (To stick with the variable rate but to make bigger payment).
This way, you benefit from a lower interest rate, pay down your mortgage faster and protect yourself against an interest rate increase.

Hi there,
I am really confuse right now. I dont know which mortagage rate should I take. My bank is offering me prime minus 0.50 (prime 3.00%) and then the other offers are 1 year fixed 2.44% , 3 year fixed 3.70 and 5 years 3.89… I am really confused I dont know which one is better and everyone is saying that the rates are going up next year… I have to take 5 year closed but I dont know which one I should take. Please help me out with this

by: The Financial Blogger | November 3rd, 2010 (11:54 am)

Hello Maria,

1st advice: don’t listen to “everyone” as “everyone” were saying that interest would hike in 2009… and then they said the same thing 2010… and they will the say the same thing until they are right 😉

Will interest rate will go up, probably. When, I don’t know.

However, what I know is that prime rate has always been a better choice over any 5 years rate over a long period of time. People who took a 3.85% 5 years fixed back in 2008 have been paying much higher than those who went on a variable rate.

I’m a big fan of variable rate but your budget must be able to take it.

why don’t you take the variable rate but make a higher payment? (at 4% for example). you will be able to pay down your mortgage faster and build a safety net if interest rate goes up.