Bank of Canada September Rate Announcement – no change

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Good morning,

No rate change at this morning’s Bank of Canada interest rate announcement & no significant change to the outlook.  

What most people want to know is where rates are heading & the forecast is still late 2022.  The key word to hang on there is forecast.  Forecasts are often wrong.. in Jan of this year the Bank expected the economy to contract in Q1 & it grew at an annualized rate of 5.5%.  For Q2 the expectation was 2.5% growth & we saw a contraction of 1.1% annualized.  For those interested the swaps traders are pricing in 1 rate hike in the next 12 months & 2 more over the following year which has come down from July. 

The not-so-silent-killer, which is getting talked about more & more, is inflation as the 3.7% reading is the highest of the last decade.  There are record long wait times for raw materials.  Canada’s Farm Product Price Index rose 24.4% YOY in June which tied for the highest reading since the high inflation of the 70s.  Prices of just about everything are going up.   

So how does inflation relate to your mortgage?  I can say with confidence that all of your mortgage rates are lower than inflation, which is actually a good thing from a borrowing perspective.  That means you’re paying back the money you borrowed with dollars that are becoming less & less valuable.  You essentially have a negative rate mortgage.  Some of your debt is inflating away without having to do anything.  That gives you an opportunity you can play 2 ways:

  •  Conservative approach: try put as much extra cash on your mortgage as possible, take advantage of low rates & try gain as much ground as you can while borrowing costs are so low.  For those that don’t like debt, this is your time to shine. 
  • Higher risk approach: use your extra cash to invest, let your debt erode away & focus your resources on growing your financial assets. 

With the conservative approach, you’ll become debt free quicker, better insulate yourself from market corrections (although following covid it’s hard to see policy makers letting markets crash), but may not benefit from growth in risk assets. 

With the higher risk approach, if we continue to see inflation at these levels or higher, your net worth can grow a lot quicker but you do run the risk of your investments performing poorly & being left with a slower path out of debt. 

These are the conversations you should be having about your finances & if you could use some help or direction, please get in touch as I have an excellent financial planner I can put you in touch with.

This went longer than usual but I’m just getting more & more questions on this topic so hope you found it helpful & please share to anyone you think will benefit from watching this : )