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Yesterday, BMO officially called for a Bank of Canada overnight rate hike based on Canadian economic growth, and today it provided more fodder for the possibility of higher mortgage rates on the horizon.

The Big Six bank provided a chart that presents yields on Canadian government five-year bonds and five-year mortgage rates.

“Five-year fixed mortgage rates tend to follow market yields, and there appears to be some upside on that front,” writes Robert Kavcic, a senior economist at BMO.

Banks use these bonds to fund their mortgage portfolios, according to one economist, which explains the connection.

The overnight rate, which currently sits at 0.5 per cent, also influences the mortgage market, but its most immediate effects are felt on variable mortgage rates, which aren’t static.

As the BMO chart shows, the five-year bond yields have recently been trending higher, while interest rates have remained historically low — for now.

But if five-year mortgage rates follow suit as they have repeatedly in the past, Kavcic outlines a number of implications for the Canadian housing market.

“It would help contain the rebound in Vancouver housing, while stiffening the headwinds in Toronto,” notes Kavcic.

“It could also help alter market psychology if speculators start to sense a rising-rate (however modestly) environment,” he continues.

However, the short-term impact may be a flurry of sales activity, Kavcic suggests. “It could also pull some buying decisions forward too,” he adds.

BMO is not alone in its prediction that higher rates are coming this year and that the central bank will hike its policy rate on July 12th, the next scheduled rate announcement.

Like BMO, National Bank, Canada’s sixth-largest bank, points to comments Bank of Canada Governor Stephen Poloz made yesterday to CNBC to support its similar prediction.

Poloz said the current historically low rates — which are a result of two Bank of Canada key interest rate cuts in 2015 meant to help insulate the economy from a shock to oil prices — have “done their job.”

National Bank Economists Stefane Marion and Paul-Andre Pinsonnault write, “With the Bank of Canada acknowledging that most of the transition is completed and reiterating its expectation of above-potential growth in the coming quarters, the current stance of monetary policy is no longer justified.”

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