Introduction to Interest Rates
For most of this year, the markets have been focused on how quickly interest rates might come down. But a quieter conversation is starting to take shape, one that’s less about how far rates will fall and more about when they might start rising again.
Current Forecasts
The latest forecasts from Canada’s major banks show that views remain divided. While they agree that modest rate cuts are yet to come by the end of 2025, several now think the Bank of Canada could begin nudging rates higher again in 2026 as inflation proves sticky and global risks persist. The Bank’s benchmark rate currently sits at 2.50%, down by half from last year’s 5% peak. But what happens beyond 2025 is suddenly looking a lot less certain.
Diverging Forecasts Among the Big Banks
Compared with earlier projections, RBC has turned more dovish, now expecting the policy rate to hold around 2.25% through 2026—50 basis points lower than its previous estimate. BMO remains the most optimistic about further easing, calling for the rate to fall to 2.00% by early 2026 and remain there throughout the year. Others are leaning in the opposite direction. Scotiabank has revised its outlook higher, seeing the policy rate returning to 2.75% by late 2026, while National Bank of Canada has raised its call to 2.50%. TD and CIBC sit in the middle, both expecting 2.25%.
The Conflict Between Growth and Inflation
“The conflict between weak growth and high inflation is on full display,” wrote Scotiabank economist Jean-François Perrault. “The Bank of Canada and Federal Reserve should be cutting interest rates based on the growth outlook, but the strength of inflation suggests otherwise.” Perrault said that tension will likely carry into next year, with inflation expected to remain more stubborn than the Bank anticipates. “We expect that the Bank of Canada’s rate cuts will be reversed in the second half of 2026, as inflation proves more persistent than the Bank currently assumes,” he wrote.
Bond Markets and Interest Rates
Bond markets often move ahead of central banks, and several analysts say they may now be signalling a floor in long-term yields. National Bank writes in its latest Monthly Fixed Income Monitor that “any rate relief (along) the Government of Canada curve will be modest, and longer-term yields should remain range-bound for the foreseeable future, even with cuts.” At the same time, RBC economists have highlighted the role of persistent inflation uncertainty and elevated term premiums as key constraints on how far yields can fall.
Forecast for Bond Yields
National Bank projects the Government of Canada 5-year bond yield—an important benchmark for fixed mortgage rates—to hold near 2.65% by year-end, before gradually rising to about 3.0% by the third quarter of 2027. Shorter maturities are expected to stay near 2% through 2026, reflecting expectations for a modest and measured path for policy easing.
Impact on Fixed Mortgage Rates
Fixed mortgage rates could face renewed upward pressure. National Bank’s yield forecast offers a clear signal for mortgage borrowers: with limited room for further declines, fixed rates may stay higher for longer than many expect. Economists at Oxford Economics share a similar view, expecting fixed mortgage rates to remain elevated through 2026, even as the Bank of Canada continues to trim its policy rate.
Conclusion
In conclusion, the future of interest rates is looking less certain, with some banks forecasting rate cuts and others expecting rates to rise again in 2026. The conflict between weak growth and high inflation is a major factor in this uncertainty. Bond markets are signalling a floor in long-term yields, which could lead to renewed upward pressure on fixed mortgage rates. As the Bank of Canada continues to navigate these uncertainties, mortgage borrowers should be prepared for potentially higher fixed rates in the coming years.
