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The Big 6 banks have raised their expectations for Bank of Canada rate hikes, with most expecting another 125 to 150 basis points in tightening by the end of the year.

RBC was the latest to revise its expectations, matching Scotiabank’s call that the Bank of Canada’s key lending rate will reach 2.50% this year. However, RBC sees the Bank’s rate hikes being fully front-loaded to 2022, meaning it expects no additional hikes in 2023. Scotiabank, meanwhile, has pencilled in another 100 bps worth of hikes next year, which would bring the overnight target rate to 3%.

An overnight rate of 2.50% would be right in the middle of the Bank of Canada’s updated neutral range of 2% to 3%. The last time the overnight target rate was above 2% was back in 2008 during the Global Financial Crisis.

“We find ourselves once again revising our central bank forecasts higher, both accelerating the pace of tightening previously expected and lifting terminal rates for this cycle,” wrote Josh Nye, senior economist with RBC Economics. “That said, we maintain the view that in most jurisdictions market pricing is too aggressive—particularly in 2023—as late-cycle growth concerns and inflation that is starting to slow will eventually see policymakers tone down their hawkishness.”

Nye said there is reason to believe the BoC and the Fed will front-load their rate hikes earlier in this cycle, since it can take up to six to eight quarters for changes in monetary to have their full effect on the economy.

Latest rate forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.

  Target Rate:
Year-end ’22
Target Rate:
Year-end ’23
Target Rate:
Year-end ’24
5-Year BoC Bond Yield:
Year-end ’22
5-Year BoC Bond Yield:
Year-end ’23
BMO 2.25% (+25bps) 2.75% (+25bps) NA 2.90% (+30bps) 2.90% (+20bps)
CIBC 2.25% 2.50% NA NA NA
NBC 2.00% 2.00% NA 2.60% 2.60% (+25 bps)
RBC 2.50% +50bps) 2.50% (+50bps) NA 2.60% (+40bps) 2.20% (+25bps)
Scotia 2.50% 3.00% NA 3.00% 3.10%
TD 2.50% (+75bps) 2.50% (+50bps) NA 2.90% (+70bps) 2.30% (+25bps)

Reverse mortgage debt is up 18% from last year

Reverse mortgage debt held by Canadian seniors grew to $5.37 billion in February, according to data from the Office of the Superintendent of Financial Institutions (OSFI).

That’s a 2% increase from January, and up over 18% from the $4.5 billion in outstanding debt in February 2021.

Reverse mortgages allow seniors aged 55+ to access the equity they’ve built up in their homes in the form of a mortgage. They can withdraw the money tax-free in either a lump sum or monthly payments. The lender is then repaid once the home is sold or the owner passes away.

Interest rates are higher than conventional mortgages, with 5-year fixed rates starting at about 6.74%.

With a growing number of seniors needing to supplement their retirement income, reverse mortgages have seen strong growth over the past decade, particularly in 2018 when year-over-year growth rates exceeded 50%.

HomeEquity Bank, one of Canada’s two mainstream reverse mortgage providers, said it originated $1 billion worth of new mortgages in 2021, which was up 28% from the prior year.

Nova Scotia reverses course on non-resident property tax

The Premier of Nova Scotia announced last week that the province would not proceed with a planned tax on non-resident property owners.

The tax, which was introduced in the government’s spring budget, was meant to slow property speculation and would have tripled the tax rate for owners with a primary residence outside of the province.

“My intentions all along were to improve home affordability, not to be at odds with our core value of being a welcoming province,” said Premier Tim Houston. “This policy was an effort to find a solution. It was always meant to be a tool to support housing. But when you realize that the tool you have in your hand might not get the job done, you look for another tool.”

Other provinces have foreign buyers’ taxes, but most don’t impact fellow Canadians. Nova Scotia’s proposed tax was to be 2% of assessed property value for any out-of-province owners. In comparison, the speculation and vacancy tax in B.C., which also impacts out-of-province owners, is set at just 0.5%.

About 4% of Nova Scotia properties, totalling roughly 27,000, are owned by non-residents, with about half owned by Ontarians. By comparison, non-residents own 2.2% of properties in Ontario and 3.2% in B.C., according to Statistics Canada.

The province said it will leave in place its plan for a 5% deed transfer tax on homes purchased by non-owners. This will impact new buyers who don’t plan to move to the province within six months of their closing date.

Majority of Canadians expect inflation to keep rising

Despite rising interest rates and growing inflation expectations, just four in 10 Canadians expect their mortgage or rent payments to rise over the next six months.

Of those, 15% expect their mortgage/rent payments to increase “a lot,” according to a new 11-country survey from Ipsos. On the other hand, nearly a third (30%) believe their housing costs will remain the same, while 4% expect to see a decline.

On inflation, nearly 8 in 10 Canadians (79%) expect inflation will continue to rise over the next year. Of those, 44% expect it to rise “a lot.”

“While public expectations are for more inflation and price rises over 2022, the idea of a ‘new normal’ has not sunk in,” said Ben Page, CEO of Ipsos. “This means further inflation shocks are likely – so far, relatively few people globally are demanding pay rises or seeking higher-paid employment with a new company.”

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