Do coming rate hikes have you panicked?

An Oversized Increase

The Bank of Canada's (BoC) next decision on what to do with interest rates comes this Wednesday. And it's widely expected that not only will they increase their overnight rate, but they will increase it by 0.5% rather than the traditional 0.25%. This has many Canadian's stressing about what to do with their variable rate mortgage and whether or not to convert into a fixed rate.

​

I wanted to get this email and video out before news breaks of a 0.5% increase to the overnight rate. There is a lot of fear out there and let's face it, those sensational news stories get clicks and sell ads. Which isn't to say that there isn't some useful information in there but most of us just skim a headline and pass it on as fact. We live and die by these predictions whenever they're made yet they're consistently proven wrong and yet we still come back for more. Gluttons for punishment, we are.

​

Between a Rock and Hard Place

​

Tiff Macklem and the staff at the Bank of Canada have a tough road ahead of them. They're working to achieve two, somewhat competing goals amid a pandemic recovery and now an invasion of the Ukraine, which over and above the horrific loss of innocent life, has significant global economic impact. The goals as I see it are:

1. Reign in inflation expectations over the short and long term
2. Keep growth moving forward and avoid triggering an economic downturn

'Inflation' has been the term we have been seeing everywhere in the media for months now. But a new buzzword is also gaining traction: 'Recession'. The Bank of Canada has to raise rates. There is no way around it at this point. Unemployment rates have hit historic lows. Economic growth is humming along. There is simply no need for rates to be this low to stimulate the economy at this point. Businesses and consumers need to know that their money is not going to buy them less over time.

But at the same time, raising rates does not come without cost. Yes - it will send a message that curbing inflation is a priority and it will re-set those expectations. But will it lower oil prices and your bill at the gas pump? Or decrease the cost of feeding families? Or ease supply chain disruptions? Raising rates too quickly and too high carries an increasing risk: If you don't get it just right, it just may end up with having to reverse course. The BoC will have to make some kind of trade off and I suspect we'll get a little more forward guidance come Wednesday.

What to do

The bottom line is that there is still a large gap between variable and fixed rates - even if we assume a hefty rate increase on Wednesday. Going back to my email from early March after the first rate increase, I broke it down into where we think things are going over the next two years to make a decision on whether to convert to fixed rates or not. As a reminder (and this is before whatever increase comes Wednesday):

1. If we think variable rates will go up by more than 1.75% over the next two years, it makes sense to look at converting to fixed
2. If we think variable rates will go up by 1.75% or less over the next two years, it makes sense to stay variable

I have set up shop in Camp Variable for quite some time now. And I know as these rates rise, our stress levels go along for the ride. And if that means you want to look at converting a fixed rate as it's costing you sleep at night, by all means, give us a call and I'll talk you through it. My crystal ball is as muddy as anyone else's, but I do know that the variable product offers more flexibility than the fixed which has proven very valuable in times of uncertainty. it's this weird, stress-inducing paradox for borrowers. But it's also important to keep that in mind as we go forward here. We will get through this and it won't be as bad as what you read online. I think we can all agree on that!

As always, please feel free to pass this on to a friend in need and, we're always here to answer your questions and lend a hand!