Markets clash with Bank of Canada as mortgage rate bets swing

Canadian mortgage professionals faced fresh uncertainty this week as markets and economists diverge over how far the Bank of Canada would push interest rates, even as a key speech by senior deputy governor Carolyn Rogers took on outsized importance for borrowers and lenders.

The central bank left its policy rate unchanged on March 18, arguing it was too early to gauge the full economic fallout from the war in Iran.

Governor Tiff Macklem said “the risk of higher energy costs spreading and lifting prices for other goods and services appeared contained,” pointing to “an elevated level of spare capacity in the economy.”

Markets moved the other way. By Monday morning, traders priced in the likelihood of up to three interest-rate increases by the end of 2026. It reflected fears of a prolonged period of higher energy prices. Higher government of Canada bond yields pushed up funding costs and, by extension, rates on business and consumer loans such as mortgages.

Economists pushed back. David Rosenberg, head of Rosenberg Research in Toronto, said financial markets “are truly out of step with reality” in pricing in rate increases in Canada.

“Unless you believe that the best way for the Bank of Canada to deal with an exogenous price shock with a near-7% unemployment rate is to detonate the economy (I don’t), this tightening trade is nonsensical,” Rosenberg said, advising clients to buy short-term government bonds.

Meanwhile, the housing market is being hit with a “double whammy,” according to Bank of Montreal (BMO) chief economist Doug Porter: potential price squeezes at the pump and a likely runup in interest rates as five-year Government of Canada yields climb.

“It’s not good. On the one side, there’s the hit to confidence because of the uncertainty for the outlook and the very real hit to people’s pocketbooks from higher gasoline prices,” he told Canadian Mortgage Professional.

“At the same time, we’ve had this backup in long-term bond yields, which is threatening to push up longer-term mortgage rates. It’s tough for the housing market on both fronts.”

Short-term bond yields in Canada dropped after US president Donald Trump said he was halting strikes on Iranian energy infrastructure following what he described as productive talks with Iran.

The Canadian 2‑year yield, highly sensitive to central bank policy, fell about 15 basis points to 2.92%.

Overnight index swap markets still suggest the Bank of Canada would hike interest rates a total of 50 basis points by year‑end, down from 75 basis points priced in just days earlier.

For Canada’s mortgage market, the stakes are high. A central bank intent on looking through temporary energy shocks would support a more orderly adjustment in housing and debt-servicing costs. A Bank that chooses to validate aggressive market pricing could lock in a deeper slowdown.

For brokers, lenders and borrowers, Rogers’s signal on how the Bank weighs those trade‑offs could shape mortgage strategies well beyond 2026.

Source CMP
By Liezel Once