Bank economists often miss the mark on interest-rate predictions, making their forecasts as reliable as horoscopes. Instead of relying on these projections, experts suggest tracking the forward curve, particularly the two-year Government of Canada bond yield. Key indicators include when this yield is above its 18-month moving average, 50-plus basis points above the Bank of Canada’s overnight target, and its 18-month average is below its 50-month average. These signals, especially after a significant rate drop like the one on June 4, 2024, can hint at higher borrowing costs ahead.
While market indicators like swaps, futures, and forward markets are not infallible, they often provide better insights than economists who get lost in spreadsheets. However, these tools can’t predict crises or the exact magnitude of rate cycles. For instance, a crisis in 2027 could reverse the Bank of Canada’s current hike. Still, these shortcuts offer more practical guidance than overly complex models.
Some economists do get it right. Scotiabank Economics, led by Jean-François Perrault and Derek Holt, accurately predicted the Bank of Canada’s rate hike nearly a year in advance. They noted rising energy costs and other economic drivers that others overlooked. National Bank strategist Ethan Currie also anticipated hikes late this year. Their success highlights the value of focusing on core economic trends rather than relying solely on market indicators.
Instead of trying to predict interest rates, managing risk is more practical. Floating mortgages typically win, except at major inflection points. When the two-year yield starts rising and inflation heats up, it may be time to consider fixed rates. However, the best strategy depends on individual circumstances and the broader economic cycle. History shows that rate hikes eventually tame inflation, making long-term planning essential.