December 23, 2021 | Posted by: Keith Leighton


The Omicron variant coupled with an expectation of continuing high inflation has prompted investors to reconsider the possibility of future Bank of Canada rate hikes.

The 5-year bond yield, which typically leads fixed mortgage rates, has fallen about 30 basis points from its recent highs in October. There is a concern that elevated debt levels will limit the Bank of Canada’s ability to hike rates going forward. The combined debt-service ratio , including non-financial businesses, currently stands at 23%, a total debt-to-GDP equivalent of 240% of GDP, which is 66 points above the G20 average.

It will be very difficult for the Bank to normalize interest rates with this level of indebtedness. The Bank of Canada be more inclined to let prices run higher than they have in previous cycles and allow inflation to eat away at the burden of debt over time. It is expected that debt levels will make it more difficult for the Bank of Canada to hike rates relative to previous rate-hike cycles.

The Bank has averaged six hikes over its typical cycle and our record-high household and government debt levels will amplify the impact of future hikes and likely reduce the total number needed to slow inflation rates.

Fiscal and monetary policy has provided stimulus to safeguard our economic momentum throughout the pandemic. Although these measures were expensive, it has worked, it doesn’t make sense to stifle that momentum with weighty rate hikes at this time.


Provided that the Bank of Canada adopt a more measured gradual rate changes, that would lead to Government of Canada bond yields remaining below recent highs and dropping in the coming months. That would signify lower, not higher, fixed rates over the foreseeable future.

However, anyone who either already has or is contemplating taking out a variable-rate mortgage can expect possible rate hikes. It is anticipated that there will be fewer increases in the bond market but some increases are inevitable. And there are plenty of homebuyers opting for variable rates these days. Bank of Canada data indicated that borrowers opting for variable-rates are up 84% compared to a year ago, while those opting for a fixed rate have fallen 52%.

The current share of outstanding mortgages is now more than 26% variable-rate mortgages, the highest level since the data was made available in 2016. That’s because discounted 5-year fixed rates have now broken above 2.50%, a 100-bps increase from 2020 lows. Meanwhile, variable rates remain near record lows at a spread of nearly 140 bps compared to fixed rates.


Bond yields have fallen from their recent highs, leading to some lenders cutting rates in the past week. Five-year fixed bond yields reached a high of 1.48% earlier this month, but have since retreated to about 1.28%.

As a result, a number of lenders that had recently hiked fixed mortgage rates, including RBC, have had to reverse some of those hikes. Earlier this month, RBC had hiked its advertised 5-year fixed rate to 3.04%, but has since dropped it back to 2.94%.


Averaging the forecasts, the banks expect the overnight rate to rise about 1% by the end of 2022, meaning four quarter-point rate hikes by the Bank of Canada. Looking ahead to the end of 2023, the big banks are calling for an additional three rate hikes, bringing the overnight rate to 1.75%.

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