Yada Yada Yada...BoC Raises Rates Again

There's No Easy Way to Say This...

...but the Bank of Canada (BoC) is raising their overnight rate once again. This marks the 10th rate increase from March of last year for a total increase of 4.75%. And I think this one will be a particularly tough pill for Canadians to swallow. An increasing amount of financial stress is being felt. Inflation data and labor markets are both showing signs of softening. Higher borrowing costs are the most significant contributor to CPI. There is plenty of data to suggest rates are plenty high enough. Not the least of which being the share of borrowers moving to 90+ days late on credit card products approaching an historical high.

​

I can pick and choose data to make any argument I like here. To increase rates or to not increase rates (Boom. Eat your heart out Shakespeare). But ultimately, I'm not the 'Macklem' that makes the call. I think a lot of the strength that is being shown in the economy is a result of a record population growth. And please - don't take that as an indictment of politics. It's just a matter of policy. If you add more cars to the road without expanding the road - you get a traffic jam. If you add 1,050,110 new Canadians, you get an excess of demand that supply will struggle to keep pace with. We absolutely need and want immigration to sustain our economy long term. The rate of growth in Canada however is directly opposing the goals of the Bank of Canada. It's resulting in absolute growth. A gas pedal to the BoC's brake.

​

Restrictive Rates

According to the Bank of Canada, a neutral policy rate (one that neither encourages nor dissuades Canadians to borrow and spend) is between 2% and 3%. Let's split the difference and call it 2.5%. Mostly because it makes my next statement more impactful: the current policy rate is 5%. Twice the mid-point of neutral. We are well into restrictive territory and we still have yet to feel the full effects of the rate increases to date. And what that means is some form of economic slowdown is on the horizon. The odds of a recession are as high as they've been since the 1980s. 

​

I don't say any of this to be Dr. Doom. I say this to point out that a recession will bring with it an easing of the overnight rate. At least into neutral territory. And depending on the severity of recession, potentially back to stimulative territory. And while I don't think we want to expect a monumental drop below the low end of neutral, I think we can reasonably expect a drop in the Overnight Rate (and Prime lending rates) of ~2% in the coming months and years. When that begins and how quickly we get there is anyone's guess at this point.

​

What to do

​

This is the question I am asked the most - and it's not even close: What do I do with my variable rate mortgage? A distant second, but closely related, is: should I go fixed or variable? 

​

If you're in a variable rate mortgage, the move to a fixed rate might provide some relief from the possibility of future rate hikes. But it won't give you the benefit of future rate drops. This has been a wildly stressful time however it's worth noting that today, on the announcement of a rate increase, bond yields dropped (that metric that predicts fixed mortgage rates). What that could mean is that the market views this as an inflection point. The ceiling of higher interest rates. Which could mean moving to a fixed rate at their peak. It's hard to imagine we see further rate increases from here - but it's still in the range of outcomes. The market however, is not pricing in additional rate hikes for whatever that's worth.

​

For prospective buyers - we're weighing the benefits of shorter term fixed rates against the best discounted variables. While most of us still have some trust issues and PTSD around variables, objectively, they are back in the conversation in a number of situations. And if you're not rushed, we'll get to see some more data that will give us a clearer idea of where things are headed. Either way, we're ruling out longer term (4 and 5 year fixed rates) in favour of shorter term (1 to 3 years) or variable rates.

​

Like any bulk analysis, it might not be a fit to your particular situation. So please, reach out and we can connect to discuss your needs directly. We're happy to help review and provide specific options for you. And please, as always, if you found this useful, pass it on to a friend in need!