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Alongside the Vancouver edition of the rennie landscape, our intelligence group also produces editions for the Victoria and Kelowna markets. Read them at the links below.
Victoria editionKelowna edition02. rates
cruising in neutral
High inflation in Canada is now squarely in the rearview mirror, with the headline rate staying within the Bank of Canada’s target range of 1-3% throughout 2024 and the most recent reading at 2.6% in February. As we discussed earlier, Canada’s labour market has softened considerably over the past two years, in part because of high interest rates. With that, the Bank has been able to unwind its restrictive policy rate from 5.00% at the beginning of 2024 to 3.00% as of February (and since reduced to 2.75% in March). The rate now falls inside the Bank’s theoretical neutral range of 2.25-3.25% where it is expected to be neither restrictive nor expansionary.
The Bank has also ended its quantitative tightening program, which had previously been putting upward pressure on bond yields, even as they have been falling. The Government of Canada 5-year bond yield dropped from a peak of over 4% in September 2023 to around 3% at the end of 2024. It has since dropped further in 2025. Fixed mortgage rates have followed (we’ll spend more time on bond yields and fixed rates in the next section) with the average discounted 5-year fixed rate returning to 2022 levels.
Going forward, the Bank has a lot more wiggle room to respond to the ever-changing economic landscape. The governing council can take its time in evaluating the relationship between demand and supply across the Canadian economy. They can also take action and lower rates further in the event of a prolonged trade war, should it arise. If inflation continues to remain around the 2% target and the Canadian labour market remains soft, expect a few more 25-basis-point cuts to the policy rate in 2025.
Seattle editionThe Bank of Canada has brought its policy rate back into its
desired neutral range. From here, the Bank’s focus will shift to
fine-tuning the rate in 2025.
RESTRICTIVE RATE NO MORE
DATA: SELECTED INTEREST RATES AND CANADA’S ANNUAL RATE OF CPI CHANGE, MONTHLY, 2019-2025
SOURCE: STATISTICS CANADA, RATEHUB
a renewed sense of competition
The relationship between bond yields and fixed mortgage rates is based on a variety of factors, including competition between lenders and perceived risk— both of which are likely to grow this year.
Banks price their fixed rate mortgages based on Government of Canada bonds. The yields those bonds generate are considered the risk-free return one can earn on their money over a specific period of time. The difference between the fixed rate from a bank and the bond yield is the implied level of risk the bank is assuming. That spread can grow or shrink for a number of different reasons. And with a wave of fixed rate borrowers set to renew their mortgages over the next two years (which we’ll quantify later), it’s worth taking a look at fixed mortgage rates a little closer.
Banks offer different rates to different borrowers depending on a host of factors, including: the borrower’s credit, whether they have a co-signer, and whether they're purchasing mortgage insurance, to name a few, so we'll use the discounted 5-year fixed rate in this analysis.
The spread between the fixed rate and bond yield can vary quite significantly—it usually shrinks when bond yields are rising and grows when yields are falling. Using data back to 2007, it has ranged from a low of 17 basis points in March 2022 to a high of 308 basis points in February 2009. Most recently, the monthly average for February had the mortgage rate premium at 119 basis points above the bond yield. This is a little higher than the past 5-year average of 106 basis points, but less than the pre-pandemic average of 132 basis points.
Bond yields aren’t forecast to fall much over 2025, and the spread between the 5-year yield and mortgage rate is close to average. This suggests that fixed rates aren't likely to fall much in the coming months, and with increased economic uncertainty, lenders could look to higher risk premiums putting upward pressure on rates. A recent policy change from the Office of the Superintendent of Financial Institutions could offset that, however, as renewers switching lenders will no longer need to be stress-tested. This could mean good news for renewers, whose business the banks have indicated they'll be competing for in the coming months.
YIELDING INSIGHT INTO FIXED RATES
DATA: 5-YEAR GOVERNMENT OF CANADA BOND YIELD & DISCOUNTED 5-YEAR FIXED MORTGAGE RATE, MONTHLY, 2007-2025
SOURCE: STATISTICS CANADA. TABLE 36-10-0207-01
cheaper money leads to cheaper money
With inflation tamed and growth remaining sluggish, interest rates in Canada have receded from recent highs. That has not mirrored the situation south of the border of late.
High inflation in Canada has been conquered and that has allowed the Bank of Canada to reduce its policy rate back into its theoretical neutral range (where it is neither restrictive nor expansionary). The situation has been notably different in the US, where inflation has been relatively stickier and labour market conditions have fared relatively better. This has led to fewer cuts from the Federal Reserve, which has lowered its policy rate by 100 basis points from a range of 5.25-5.50% to 4.25-4.50%. This has taken the spread between the two from 25 basis points last June to 150 in March.
Historically, when Canada has lower interest rates than the US, it has corresponded to a weaker Canadian dollar, as capital moves south to achieve higher returns. Additional uncertainties around tariffs have been weighing on the loonie of late, as the country whose exports are being tariffed typically sees its currency weaken as a result. The Bank of Canada is expected to lower its policy rate further in 2025 (including our own forecast to 2.50%), while the Federal Reserve is likely to hold its rate higher, longer. In light of the current trade conflict, expect further damage to the Canadian dollar relative to the greenback in the near-term.
A GROWING DIVIDE BETWEEN NATIONS
DATA: BANK OF CANADA POLICY RATE, FEDERAL FUNDS TARGET RANGE - LOWER LIMIT, CAD/USD EXCHANGE RATE, MONTHLY, 2008-2025
SOURCE: STATISTICS CANADA, TABLE 10-10-0145-01, US FEDERAL RESERVE, BANK OF CANADA
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Disclaimer: This representation is based in whole or in part on data generated by the Chilliwack & District Real Estate Board, Fraser Valley Real Estate Board or Real Estate Board of Greater Vancouver which assumes no responsibility for its accuracy.
Disclaimer: This representation is based in whole or in part on data generated by the Chilliwack & District Real Estate Board, Fraser Valley Real Estate Board or Real Estate Board of Greater Vancouver which assumes no responsibility for its accuracy.
Disclaimer: This is not an offering for sale. Any such offering can only be made by way of disclosure statement. E&OE. The developer reserves the right to make changes and modifications to the information herein without prior notice. Photos and renderings are representational only and may not be accurate.
Disclaimer: This is not an offering for sale. Any such offering can only be made by way of disclosure statement. E&OE. The developer reserves the right to make changes and modifications to the information herein without prior notice. Photos and renderings are representational only and may not be accurate.
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