We've reached the summit...and the air is thin

Bank of Canada (BoC) interest-rate-sherpa Tiff Macklem has guided us to the summit of Rate Hike Mountain. It's been a gruelling climb. And the air is way too thin. So how exactly do we get down to base camp from here??

The BoC surprised no one today with a 0.25% boost to their policy rate. It was widely expected across all markets and analysts. And while that's hardly good news for variable rate credit products, there was a silver lining in today's messaging. It would seem as though the long awaited pause to these persistent rate hikes is upon us.

Key Takeaways

By no means is the inflation dragon slain. But the BoC has it on the ropes. In an announcement that carried a much softer tone than was expected, they went out of their way to make reference to one of their key inflation metrics:

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​​"3 months CPI has fallen to about 3.5% suggesting a significant slowdown in inflation in the coming months."

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When you combine that quote with an explicit message around their intention to pause rate hikes, the BoC is acknowledging that the heavy lifting has been done. Metrics are heading in the desired direction. And the only expected missing ingredient is time. Time for these rate hikes to complete their job and bring inflation back into target range.

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What Will the Response Be?

Immediately on the heels of today's announcement, bond markets moved to expect rate drops to begin in October of this year. And while these predictions have proven questionable at best in recent history, what it represents is an inflection point: a change in outlook. And a welcome one for many of us.

We have endured the most aggressive rate increases in a generation. It's been just a little bit intense. And since the early part of 2022, the average Canadian has expected things to be worse in the near future. Higher rates. Tighter cash flow. $47 eggs. What most consumers have been waiting for is a signal that the worst is over. That they can look forward with some semblance of optimism that things will begin to get better. 

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Where do we go from here?

I have been saying this for a while now: we've all just been waiting for some sure footing. A place we can make decisions with some degree of confidence. There has been so much unknown and fear around it that it's crippled decision making and put people square on the fence. We are, after all, wired to look out for dangers. My hunch is that the pent up demand that has been sitting on the bench will want to get back in the game.

This is where things could get interesting. Barring any unexpected shocks to the system, fixed rates will begin their trend downwards (well ahead of any BoC rate cuts). It will be a slow descent - but a descent nonetheless. This could spark consumer confidence. But too much (read: spending) could make the BoC's job a little more challenging triggering a game of interest rate chicken between the BoC and heavy spenders. And though I don't think that's a likely outcome given the full effect of rate increases have yet to be felt as well as a looming recession, consumer sentiment and spending habits will still be worth monitoring.

So what should you do?

1. If you have questions, reach out. Call. Text. Email. Singing Telegram. Dealers choice.
2. Pass this on to a friend. Or an enemy depending on how much you liked it.
3. Eat your veggies. They're good for you.