Another one...

No Spoonfull of Sugar Here...

Would that I could make this medicine go down a little easier for us all today. But alas, here we are facing another, larger than normal, 0.5% increase to the Overnight Rate. The Bank of Canada (BoC)is taking a rather aggressive tone in tackling very hot hot inflation which is evidenced in both their language and actions. In weighing the risks between a rock (recession) and a hard place (inflation), they are clearly more concerned with the hard place (inflation). It is the lesser-evil to have to re-stimulate an economy that dips into recession than it is to let inflation and inflation expectations run wild. And so we get what we have here today: higher interest rates and tough talk on tackling inflation. 

It's worth noting that surging inflation isn't just a Canadian phenomenon. This is a Global issue that is largely triggered by high energy and fuel costs, supply shortages across many industries and an invasion of Sovereign Nation. But the BoC can only control what it can control. And that is domestic interest rates. If it feels kind of like someone brought a sledgehammer for a job that requires a screwdriver, you'll get no argument from me. Which leads me to believe that these increases should impact sooner rather than later. And I think we're seeing that in some market segments already which will turn up the recession talk, and turn down the inflation talk. And that's right where the BoC wants the focus to be in my opinion.

The Impact for Borrowers

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If you're in a fixed rate, it's the status quo for you. But, if you're in an adjustable or variable rate mortgage or line of credit, your cost of borrowing has just gone up. Which will trigger the most asked question of the year: "Should I convert to a fixed rate?!". My answer here would be that fixed mortgage rates (currently averaging ~4.5%) have priced in their expectation of the Overnight Rate getting to 2.75%. As of today, we're sitting at 1.5%. That means that fixed rates are likely at or near the high of where they're going to be for the near future. And unless the expectations for the Overnight Rate start to go to 3% or beyond, there's really no urgency to convert to a fixed rate. Your variable/adjustable rate is still significantly lower (by 1.5% to 2%) than where fixed rates are at today. 

I'll be doing my best to reach out to our current borrowers to have a chat on all of this and answer any questions you have. If you want to get a jump on that queue, please feel free to reach out and we can set a time to connect. I know there will lots of questions on this topic and I'm more than happy to go over them with you!

Where Do We Go From Here?

This is already the most aggressive rate tightening cycle in more than 20 years. Since March, we've seen a 1.25% increase to the Overnight Rate. And for a population that is used to low interest rates and growing mortgages, these increases will take a bite out of spending. So it is entirely plausible that we see a pause in these rate hikes at some point in the near future. But those decisions will be made based on what the data suggests. If expectations around inflation start to drop and if spending starts to dry up, we will likely see that pause in rate hikes. If we don't, it's possible we see some more rate increases this year. 

At the risk of recycling my old content, we can't and shouldn't expect what we're seeing today to continue. Economic conditions will change - though it's hard to predict when. But inflation will be reigned in over time and we will return to some semblance of normalcy and we'll laugh about the time we thought the sky was falling. Ahhhh. Good times. Until then, we're here to support in whatever way we can!

So please, reach out if you have questions and as always, feel free to pass this on to someone who could use it!