Economist ses fixed and variable rates holding steady for a while
Last week’s decision by the Bank of Canada to leave its benchmark rate unchanged has reinforced expectations that borrowing costs are set for an extended period of stability – with both fixed and variable rates expected to hold steady.
That’s the view of Bank of Montreal (BMO) Capital Markets director and senior economist Sal Guatieri (pictured top), who told Canadian Mortgage Professional there likely wouldn’t be many surprises on the rate outlook for a while.
“It’s pretty steady as she goes for interest rates,” Guatieri said. “And that would probably apply to mortgage rates as well. We do not foresee any adjustment in policy rate this year or next year. So variable mortgage rates will remain pretty static.”
That means borrowers will likely be spared a repeat of the volatile rate environment that’s pervaded much of the past few years, with Government of Canada bond yields – which heavily influence fixed mortgage rates – also expected to remain largely unchanged.
Inflation outlook: a spike higher, ‘but ultimately a retreat’
Guatieri sees limited scope for much movement in longer‑term borrowing costs, with the bond market expected to tread water.
“Even longer-term interest rates in Canada — the 10-year Government of Canada yield is now at 3.5% — [are] likely to stay pretty close to current levels simply because we won’t see the Bank of Canada adjust policy rates,” he said.
“Our overall view for inflation is a near-term spike higher, but ultimately a retreat, and for the most part the core measures of inflation remaining pretty close to the 2% target. So we see both short- and long-term rates in Canada remaining pretty close to neutral levels and do not anticipate much change going forward.”
If that forecast holds, it suggests the Bank may feel little urgency to either raise or cut rates. With inflation essentially hovering around target and the economy growing modestly, holding the policy rate near what many economists view as a neutral level – neither stimulative nor sharply restrictive – could prove the path of least resistance.
CUSMA uncertainty, but status quo still expected
Another key variable for Canada’s medium‑term outlook is the upcoming review of the Canada‑United States‑Mexico Agreement (CUSMA, known as USMCA south of the border), which will help define the North American trade relationship in the years ahead.
The deadline for that review is the beginning of July, with plenty of uncertainty still hovering over the economic outlook amid continuing tariffs and trade tensions between the US and Canada.
On that front, Guatieri anticipates a drawn‑out process rather than a swift resolution, meaning that lack of clarity will probably continue for a while yet.
“Our assumption there is that we see an annual review extend through this year, through next year, maybe even the year after, until they finally come to some agreement and renegotiate the USMCA,” he said. “We do not expect a quick review process that ends with a continuation of the agreement.”
Still, the baseline scenario is that the US ultimately remains in the pact, preserving the basic framework of tariff‑free trade that has underpinned the continent’s tightly integrated supply chains for decades.
“We also are assuming that the US does not walk away from the Free Trade Agreement,” Guatieri noted. Under that outcome, “the status quo of annual reviews — and importantly that preserves the compliance exemption that allows most Canadian exports to the US to remain duty free.”
That carve‑out is “very important for Canada’s economy,” he added, suggesting it could help Canada avoid “at least a moderate recession” that might otherwise result if Washington were to pull out and tariffs were reimposed on a wide range of goods.
“Clearly it basically will keep us out of at least a moderate recession in the event that we did lose that compliance exemption because the US walked away.”
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