Many Canadians ( myself included) were anxiously awaiting this morning's interest rate hike announcement by the Bank of Canada. It had been speculated for months that we would be seeing quick interest rate increases within a short period of time. I was holding out hope, as usual, due to my naturally optimistic and ebullient nature, that we would perhaps only see a small incremental increase. It's not a secret that speculators aren't always right - they are often wrong. A Lot!
Alas, that was not to happen today :) The Bank of Canada has indeed hiked its benchmark interest rate by half a percentage point. It is the largest increase since May 2000. This latest increase is expected to prompt the big 5 banks to raise their prime rates by half a percentage point to 3.20% from 2.70%. YIKES
I know, I get it. Rates can't stay low forever. Artificially depressing interest rates have been largely responsible for the huge run-up in housing prices that we've been experiencing. This has resulted in making buying a home unaffordable for many Canadians.
But don't let anyone fool you - though I believe the increase will help to cool the housing market. Raising interest rates won't lower global oil, base metal, lumber, food seed prices, or fertilizer. My hope is that the actual causes of inflation ( supply chains, War in Ukraine, pandemic panic) will be finally resolved.
Yes, the government will of course take credit when it heads in the direction they want. They can have that "attaboy win" if it means they'll stop the hikes. After all, by just saying they're going to increase rates- I'm sure will have much of the same effect as actually increasing them.
The psychological impact can extend much wider than the actual financial impact. It's human nature. Scare people straight into what you want them to do, without doing what you said you would do.
As many of you reading this know- buyers during the frenzy were being outpriced and they out-leveraged themselves extensively to snag a home. What happens now? Well, homeowners will now have to face the consequences of higher monthly mortgage payments with each rate increase. Those of you who already have locked in mortgage rates still need to be concerned when your term comes up for renewal. What will the rates be like then? I recommend socking away the difference between what you're saving now in some type of savings account and then drawing on that money later when/if the rates go up.
Bank of Canada Governor Tim Maccklem states "While we've been clear with Canadians that they should expect a rising path for interest rates, seeing their interest rates and other borrowing costs increase can be worrying. "
I'm certainly glad he is aware of the level of anxiety this will cause Canadians. The psychological impacts alone will send people into panic mode, which will result in the locking in of their rates now or pulling the brakes on future purchases.
The days of low-interest rates which resulted in more money going towards principal are behind us for now. The Bank of Canada says, "They have an inflation target, not an interest rate target." A neutral inflation rate which they estimate is between 2-3%
How high interest rates go will depend on how the economy responds. If interest rates don't respond, we will see more increases to bring inflation under control.
Truthfully, I can't see interest rates being raised so ostensibly high to fight inflation without taking into account what it's doing to the people. If history has taught us anything, it is that the government always reverses course due to "tightening" happening too quickly. Do you really believe that they want to raise rates so high till it manufactures a recession and ultimately crashes the markets?
| think not!
It would be extremely reckless. I would like to believe ( maybe foolishly so) that our government is more responsible than that. The government traditionally likes to protect the markets, and will absolutely say what they need to about inflation percentages and the effect price increases have on consumers, and then Bingo-- all of a sudden- a reversal. They'll find something to blame for reversing course. Another war, a new virus? Who knows?
Let's face it, the Bank of Canada really has no influence on the world market prices of anything. Choosing to raise rates to quell inflation will certainly make life more difficult for Canadians while the world continues to struggle with upward pressure on prices.
Time will tell though and, as we all know, change happens quickly - like a mighty rushing wind.
Will I be locking in? I'm a variable rate baby. I have a high risk tolerance and prefer riding that variable rate roller coaster. I don't think I'll be getting off it anytime soon, but I will be paying close attention. The way I see it - based, on a calculation provided to me by a credible mortgage broker - It's a $14 increase per 100k on a mortgage per 0.25%. I'm not ready to panic yet.
I would love to know what you think. Are you worried?
Thanks for reading ( please note that these are my own personal opinions. Any figures or insight are not to be taken as legal or financial advice)
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