The Canadian economy is performing stronger than it was during a difficult second quarter, according to the National Bank of Canada, but the Bank of Canada will likely hold its benchmark interest rate for the foreseeable future.
“We are keeping unchanged our Canadian GDP growth forecasts for both this year and next at 1.2% and 1.8% respectively. Unless the upcoming fiscal stimulus from the federal government is targeted effectively as to lift the economy’s potential, Canada will be stuck in low-growth mode,” National Bank’s economists said in their latest Economic Outlook. “Facing a lower real neutral interest rate, also a result of declining potential growth, the Bank of Canada will have no alternative other than keep the overnight rate low for years to come.”
On the positive side, exports saw an uptick in July and Canadian consumers are benefitting from the enhanced Canada Child Benefit, the authors said. “However, investment remains disappointing, hurting economic growth not just contemporaneously but also in the future via a lower potential.”
As for housing starts, the bank is forecasting slight softening across the country.
Variable mortgage rates are closely tied to the overnight rate; fixed mortgage rates, on the other hand, are impacted by bond yields.
TD Predicts the five-year government bond yield will steadily increase starting next year. The five year yield closed out 2015 at 0.73% and it is expected to end 2016 at 0.7%.
However, it will eventually see slight upticks each year.
The bank forecasts the five-year bond yield percentage will be 0.95% at the end of 2017, 1.30% at the end of 2018, 1.55% in 2019, and 1.80% in 2020.
Rates are dependent on a number of economic factors. This year, the economy is expected to grow by a mere 1.1% this year. However, it is expected to grow to 1.8% next year, driven, in large part, by rebuilding efforts due to the Alberta wildfires this year.