Last Friday we learned that Canadian GDP grew by 0.6% in May, which was three times the consensus estimate of 0.2% for the month. It now looks as if our second-quarter growth rate will come close to matching the 3.7% rate we saw in the first quarter (which led the G7 countries). Interestingly, while Government of Canada (GoC) bond yields initially surged higher on the news, they actually closed lower by end of day on Friday. While that may seem counterintuitive, because bond yields should rise if investors expect higher interest rates in future, here are some of the factors that may have contributed to that outcome.

Market watchers (and mortgage borrowers) are looking for signs that reinforce the view that the BoC will continue to raise rates - and suddenly every positive economic data point is being interpreted as further proof that more near-term rate hikes are inevitable. In today’s post I am going to put on my contrarian hat (it’s never too far from reach) and make the case that the consensus is now overestimating future path for Canadian mortgage rates.

The Bank of Canada (BoC) raised its overnight rate by 0.25% last Wednesday, as expected, and lenders wasted no time in increasing their prime rates, on which our variable-rate mortgages are priced, by the same amount. The key question now is what happens next? Should we expect more increases by the BoC at their upcoming meetings? Or will the BoC adopt a more cautious wait-and-see approach? How will our economy, with its newfound momentum still far from assured, respond?