In its latest long-term economic forecast, the big bank predicts the Bank of Canada will hold its target at 0.5% until sometime in 2019, when it will be hiked to 1%. That will eventually give way to another interest rate increase in 2020, according to TD, when it will settle in at 1.25% to close out the year.
“Slower trend economic growth will also restrain the level of interest rates. 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,” TD said in its forecast. “Even as rates move higher, they are likely to rise to just 1.25% by the end of the forecast horizon in 2020.”
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.
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TD Bank forecasts the Bank of Canada overnight target rate will remain unchanged until 2019.