Bank of Canada 0.75% increase – Sept 2022

Good morning,

The Bank of Canada raised another whopping 0.75% at this morning’s rate announcement, making a total of 3% in the last 6 months & leaving the door open for more rate increases.  This has been a massive move in a short period of time & based on their announcement we may not be out of the woods yet. 

GDP is weaker than projected with the last 2 month’s readings being 0% & -0.1%.  Growth has clearly turned.  Housing continues to pull back across the country however inflation is still high at 7.6%.  The target is 2%.  We’re a clearly a ways off from that so the question is, are we going to see the Bank of Canada continue to march up rates until inflation starts with a 2?  They could have raised rates by 3% this morning & next month’s reading still wouldn’t be close to 2%.  Is the plan to talk aggressively to decrease how much further action they’re going to take?

2 weeks ago Tiff Macklem who heads our Central Bank published a special in the National Post, which is not normal & points to how much anxiety is out there. 

In that piece Tiff highlighted that inflation appears to have peaked but that it also remains far too high & will likely remain too high for some time.  He continued that they need to tame inflation back to 2% by raising borrowing costs in the “short term.”  They don’t want to choke off demand, but slow it’s growth for what they call a “soft landing.”

How much confidence do you have in the same people who are largely responsible for the high inflation we’re experiencing today, who were clueless as it ramped up, refrained from doing anything while inflation was accelerating all last year, to be able to artfully land this ship without triggering a recession?  Inflation hasn’t been at 2% in over 1.5 years & they did nothing for the bulk of that. 

I thought I’d go back over the recent history of Central Bank messaging & highlight some of the statements to give an idea of the type of accuracy we can expect here:

When Covid hit, Tiff Macklem said (a number of times) that they didn’t plan on raising rates until well into 2023, to be assured that we will have low borrowing costs “for a long time” & suggested to anyone “considering making a major purchase (… or) investment, you can be confident rates will remain low for a long time”.

It’s not 2023.  Rates are not low. 

In the 2nd half of last year, while inflation was ramping up, their statements highlighted that inflation was going to be temporary & that even though it was above their 2% target, that was “as expected.”

As recently as December of 2021, while inflation continued to ramp up, they stated that inflation would be back to 2% by late 2022.

One month later at their January 2022 meeting that changed to inflation will decline “reasonable quickly to about 3% by the end of this year.”

Two months following that statement inflation was all of a sudden not a temporary phenomena & actually a problem & so began the rate hikes.

Those comments haven’t aged well & all but the 1st aren’t even a year old!

So what to do with your variable rate mortgages?  CIBC came out last week stating they think this will be the final rate increase we see but if you take Tiff at his word, we have more rate hikes to come.  The Bank of Canada has highlighted recently that they are “front loading” the rate hikes & in the post called attention to the hikes being short term but what are you to believe? 

If you’re in a variable, you can always lock in but the question is if it’s worth locking into a fixed rate of 4.5% – 5% to avoid having your variable cross that threshold for, say, 6 months?  For 12?  Are you OK giving up the option of benefitting when rates do eventually drop? 

Variable rates have only really been going up for 6 months & only recently have crossed the threshold of being more expensive per month than if you had gone with a fixed rate for most variable rate mortgages.

Would you have felt the same pain or anxiety you feel now if you had taken a fixed rate right from the get go & had been paying considerably more being in a fixed for the past many years while the variable has been lower? 

Feeling safer comes with a premium.  Feelings should never drive financial decisions.

I’m going to highlight some action points below if you are a in a variable but please do reach out to me today if you would like to discuss any of this. 

OPTIONS:

Lock into a fixed rate around 5% depending on the term with no cost to do so:

PROS:    

-piece of mind

CONS:   

-not being able to benefit from potentially lower rates in the future  (when rates drop fixed rate penalties get expensive)

-taking on significantly higher penalty risk

If you’re in a fluctuating payment variable rate, switch into a fixed payment variable rate & extend the amortization back up to the max

PROS:    

-with fixed payments your cash flow will not be impacted by the rate changes as your payments are fixed (but the amount that goes towards principal/interest will fluctuate as rates change)

-when rates do eventually drop you will pay your mortgage off quicker as more of your payment will then go towards principal vs interest

CONS:   

-will incur a small 3 months interest penalty

-will not be able to benefit with lowering payments from dropping rates

Move into a 1 year fixed rate term

PROS:    

-payment/rate security to ride out the current rate volatility

-not locking into a long term at a time where rates are just below the peak & hopefully renewing that mortgage in a year’s time where rates should be lower than today.

CONS:   

-will incur a 3 months interest penalty

-cannot benefit from lower cash flow with lower payments until renewal

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