Uncle Tiff has spoken! What today's Bank of Canada announcement means going forward...

Steady as She Goes...For Now...

It's really difficult to sift through news and economics headlines without coming to the conclusion that the sky is falling and rates are going to the moon! But what is realistic here? Neither Meteorologists nor Economists seem to get their predictions right with a high degree of accuracy yet we live and die by their predictions year in and year out. Now, I'm no better and I certainly don't have a crystal ball to predict exactly where things are going - but that won't stop me from trying!

The Bank of Canada announced today that they are holding rates steady for the time being but have moved up their projections for a rate hike. Tiff Macklem, Governor of the Bank of Canada now expects they will be increasing the overnight rate in the middle quarters of 2022. Though they still believe strongly that the inflation we're seeing is due to temporary factors, it may last longer than they initially expected and so they could be forced to act sooner.

We Demand You Increase Your Supply!

The interesting part of this for me is that inflation is normally a demand side issue. Increasing wages means more money in pockets to be spent which gets met with higher prices to balance things out. But the situation is different this time it would seem. The majority of inflation is being chalked up to increase in energy prices and supply chain disruptions that create shortages of things people are trying to buy. Some might say it's similar to the Canadian housing market. You have a lot of people trying to buy something that's hard to come by and so prices increase to balance things out.

The Bank of Canada has earned a ton of street cred for navigating Canadians and the economy through some pretty brutal times: The sub prime crash of 2008 and now the pandemic. And the fact that most of us have only ever seen inflation as a concept in school shows how well they've done their job in recent history. But the primary tool of the Bank of Canada is monetary policy. And in this case, it's raising interest rates which will stress Canadian's budgets and hormones and slow down demand. But it will have no impact on supply which seems to be the primary issue for price increases.

Take the Canadian housing market as an example: how many Government interventions have taken place aimed at slowing down demand? Shorter amortizations. Stress Test qualifying rates. Lowering limits on what mortgages can be insured. And those are just a few. And how has that worked for reducing house prices? They're likely lower than they would have been without those limits but it doesn't solve the fundamental issue of a lack of supply. The difference with what we're seeing now with inflation is that a lot of these supply issues will be resolved at some point as vaccines take root, world economies open up and production issues get resolved. All of which will have a dis-inflationary effect.

So Inflation isn't Real?!

Well...not exactly. The inflation we're seeing is very real. But it's also different than what we've seen previously. And so I think the Bank of Canada will be more careful with how they attack it. Raising rates too high too fast to attack a problem that will very likely begin to resolve itself could end up doing more harm than good (*whispers*: recession). Canadians are very sensitive to rate increases right now and I think caution should be exercised with rate increases.

What do I do then?!

If you've gone into a variable rate recently, we knew rates were going to increase and it has been planned for. Don't press the panic button. There is still a ton of savings to be had a ton of flexibility within that product while we navigate through the unknown. If you're in a fixed rate, perhaps it's time to revisit those options. Fixed rates are rising and look to continue which means it's very likely cheaper to get out of that mortgage than it's been in a long time. It could be time to review those options if that's been on your mind lately.

And to illustrate with some numbers: let's say you took out a $500,000 mortgage today and you're debating fixed versus variable. And let's say the Bank of Canada starts increasing the Overnight Rate by 0.25% every two months starting in July 2022 for a total of 6 rate increases or a 1.5% bump in the overnight rate. That's a very aggressive schedule that takes us back to pre-pandemic levels. Even in that scenario, choosing a variable over a fixed rate would save you $301.10 over the term!!! 

Like I said earlier, none of us have a crystal ball and so we have to be careful not to react too strongly to the headlines out there. Yes - rates will rise and very likely sooner than what was expected earlier this year. But there are still a lot of dominoes yet to fall and I believe strongly that now is the time to be patient. And if you want to chat about your situation, I'm more than happy to connect and get you the information you need. And please, feel free to pass this on to a friend if you found it useful and helpful!