Wow, the last month has been one of the craziest I’ve seen in my 12 years doing this job. The Bank of Canada raised rates by 0.5% at this morning’s interest rate announcement.  Big move. 

The last month saw the biggest jump in fixed rates in over 30 years with most lenders in Canada now above 4% for a 5 year fixed.  All the worst expectations for inflation & rate hikes seem to be priced in but it’s important to remember where we are in the business cycle & how that can impact some of these wild rate hike expectations.

Before we get into it, remember, if you’re in a fixed rate.  Today’s move doesn’t directly impact your mortgage.  You’re locked in.  What I would suggest, though, is starting to think about your payments at renewal & what you can do to prepare for that.  Get in touch with me to discuss strategies to brace for that.

If you’re in a variable rate, it’s important to keep in mind you’re still saving a significant amount vs locking in here.  Even with a 0.5% jump today, locking in would mean a rate likely around 1.5% more than you’re in currently.  We’re going to get more rate increases, but remember that the variable only costs more if rates rise by not only that much, but more & stay there..

Let’s talk about inflation.  Inflation tells us what happened, not what’s going to happen.  Prices have been accelerating upwards for over a year.  While our central bankers were telling us it’s not an issue, transitory was the word often used, & would ease by the end of this year, it was ripping.  They explicitly wanted it to run hot & now, after keeping rates at record lows & lower than they should have been all the way up until last month, it’s hot.  The question is, will it continue to stay hot? 

Inflation is a rate of change measure.  It was March of last year when inflation started picking up so due to higher base effects, it will be a steep hurdle for CPI to continue these high prints moving forward & not start to come down.  We would need something like oil alone to avg around $150 / barrel for the entire month.  It’s already dropped approx. 20% from last month’s high. 

The other piece to weigh into this is demand destruction.  With fixed mortgage rates over 4%, will house prices continue to rip to the upside?  The real estate market in Canada appears to have peaked last month as higher rates started to be felt.  With gas & energy prices eating into disposable income, will consumers have the same firepower to put cash into renovating homes, buying cars, taking vacations, etc. ?  No.  In a lot of ways, the bond market & higher costs are doing the Bank of Canada’s work for them in slowing growth & cooling things down.

So inflation tells us about the past, what do the forward looking indicators suggest we can expect?  All signs suggest to central banks tightening & raising rates late in the cycle & into an already forming slowdown.  A recipe for a recession.

In the US, a famously reliable indicator of a recession within the next 2 years is the spread on the 10 year & 2 year bond yields.  The spread inverted which means the long bond has a lower yield than the short term bond.  That means rates are going to go up & then come down.  Central banks rising rates is going to break things.  Personally I would be shocked if they get anywhere near the rate hike expectations this year without triggering a recession by the end of the year. 

Consumer cyclical stocks are down approx. 20%.  The transport new orders index has seen an extraordinary reduction in new orders.  China’s PMI went from 50 to 42 which is a massive move.  These aren’t things that suggest anything but a big slow down ahead.

It never feels good as rates go up if you’re in a variable.  It feels even worse reading all the sky is falling articles in the news about inflation & 2% rate hikes this year, but don’t react based on feelings.  Remember, even if we get another 1.5% in rate hikes this year, depending on your variable rate, you’re still saving money.  You’ve saved a significant amount riding it out this far.  The more rate go up, the less potential they have to continue going up.  Locking in immediately takes on a higher penalty risk, higher payments, higher cost.  Do you want to be doing that at a time when inflation & growth is already slowing on rate of change terms? 

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