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Bank of Canada 0.5% rate increase – June
/in Misc. /by adminThe Bank of Canada followed through with their 3rd increase of 2022 & raised rates by 0.5% at this morning’s rate announcement. That brings the total number of increases to 1.25% on this rate hike cycle & the same total amount as the last rate hike cycle in 2018. There are additional rate hikes being priced in for this year & the way things look now another 0.5% increase at the July meeting is looking likely.
I know for a lot of people, reading that tends to result in the knee jerk reaction of wanting to lock into a fixed but keep in mind, doing that is locking in another 1.5%+ rate hikes right away & takes on a significantly higher penalty risk if you break your mortgage early.
Psychology is a funny thing as, from the conversations I have with clients, many people tend to think that if your variable rate ends up getting to the same level as the fixed rate, then it’s been a mistake.. the reality is it’s still been a good move as you’ve saved on the way up. For a variable to end up costing more over your term it would have to continue rising & stay there.
The ”stay there” is the key piece. If you look at past rate hike cycles you’ll see that anytime we’ve seen sharp rate increase like we’re seeing now, it tends to result in rates falling just as sharply & roughly a year after the rate hikes started.
HISTORY OF PRIME RATE IN CANADA
It’s called variable for a reason. What goes up, goes down & what goes up quickly, comes down quickly as the shock has a more significant impact.
I wanted to take a step back here & put into context what has happened over the last 2 years because a lot of people like to lean on the forecasters. The Bank of Canada in 2020 said repeatedly that it would not raise rates until 2023. How many people based major financial decisions around that guidance?
While they were saying that, our federal government was flooding record amounts of stimulus into the bank accounts
of Canadians & I think we all heard no shortage of stories of cheques that went out to people or companies who frankly, didn’t need it.So we had record low borrowing rates, free money flying around & of course that turbo charged demand, all at a time where lockdowns & restrictions wreaked havoc on supply chains. The Bank of Canada said repeatedly they intended to let inflation “run hot.”
All of last year inflation started to build, and build and build. In the face of the highest inflation reading in nearly 2 decades, the Bank of Canada left rates unchanged at their January meeting. Then, the rush to play catch up & come in hot & heavy with 50bps hikes.
The thing with high prices is that they are cured by high prices. Meaning, high prices take away from the potential to spend elsewhere in the economy so demand suffers. As demand goes down, so eventually will prices. Canada’s GDP for Q1 came in well below expectation at 3.1%, compared to 6.6% last quarter.
Growth is slowing. Add on to that how mortgage costs have doubled this year & you have a recipe for recession. It’s not a question of if. It’s a question of when.
Bank of Canada 0.5% Rate Increase – April 2022
/in Misc. /by adminWow, 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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Bank of Canada Rate Increase – Feb 2022 announcement
/in Misc. /by adminGood morning,
The Bank of Canada raised rates 0.25% at this morning’s interest rate announcement, and so begins the rate increase cycle.
The invasion of Ukraine has thrown a lot uncertainty into the geopolitical landscape. Oil prices & other commodities have risen sharply, which will add to inflation around the world & weigh on global growth. So we have rising inflation pressures with slowing growth. Not a great setup.
In decades past a rising oil price benefited our currency as there was a stronger link between capital spending & energy prices but due to environmental, social & governance pressure with the push for clean energy, we aren’t seeing that here. The last time oil was over $100 / barrel the loonie was close to par with USD so greater purchasing power reduced costs. Right now we’re at 78 cents.
Inflation is still well above the Bank’s 2% target with CPI sitting at 5.1%. The war in Ukraine will keep that elevated & raise the risk of rising longer term inflation expectations.
What impact will this have on rates? The 5 year bond yield, which the 5 year fixed rates is priced upon, has dropped since the invasion started, opening the door for a potential easing to 5 yr fixed rates. Rate hike expectations on what the Bank of Canada will do has now dropped from 6 to 5. Upward pressure on interest rates has eased a bit.
If you’re in a variable rate mortgage, a rate increase is never what you want to hear but it’s important to remember that we knew rates were going to start going up here & continue going up this year, but being in a variable, you’re still saving a significant amount vs being in a fixed rate or locking. Fixed rates are generally well above 3% so compare that to what you’re in right now in a variable. Is the next 5 years going to be the 1 time in 10 a fixed rate ends up costing less than a variable rate? I don’t think so but if that anxiety is weighing on your variable rate, get in touch & we can talk through the decision to lock in.
The last point I’ll end on is if you or any friends or family have a mortgage coming up for renewal in the next 2 years, get in touch with me if we haven’t already spoken. What we’ve been doing for clients the last few weeks is going over how much higher rates would have to rise from here to make renewing early worth it.
That’s it for me.
Thanks for watching & have a great day.
Bank of Canada Rate Announcement – Dec 2021
/in Misc. /by adminNo real change in messaging with the Bank of Canada’s interest rate announcement this morning. No change to rates. No indication they’ll be moving up their guidance to be looking to raise rates in the middle quarters of next year. That said, the risks appear to be to rates going up sooner than expected as markets are pricing in 1 rate hike in March but that is obviously something that can change.
I’ve gotten a lot of inquiries from clients in the last month in variable rate mortgages wondering if they should lock in. Yes, rates are going to start going up next year but that, in itself, isn’t a reason to lock in. It’s a question of how many rate increases & how quickly we will get them that determines whether locking in makes sense.
Right now, variable rates are significantly below fixed rates. Last year we had fixed rates close to 1.5%. Going fixed was extremely compelling. Right now fixed rates are close to 3%. Compared to current variable rates you’re 5-6 Bank of Canada rate increases (1.25-1.5%) away from that. The last rate hike cycle saw 5 increases & it took 1.5 years to get there. If you are concerned about rates going up & lock in, you’re guaranteeing those rate increases immediately vs being able to save a significant amount over the next 2 years let’s call it & for that to pay off, you not only need those 5-6 rate increases but continued increasing beyond that point.
If you lock in, you also immediately take on the risk of a higher mortgage penalty & if you are like the overwhelming majority of Canadians who break their mortgages early, that’s not a good thing.
As well, locking in a variable you lose any potential benefit of being able to ride rates back down if the economy slows & we enter a recession. There is a nimbleness to the variable rate that is a big reason why it’s been the better play close to 90% of the time so keep that in mind & if you’d like to talk about your specific situation please get in touch.
The one topic that often comes up is the 70s, 80s & early 90s when we had double digit mortgage rates & concerns we could get back to that. Well, back then there wasn’t anywhere near the same amount of government & private debt as we have now so the economy could handle significant rate increases. Completely different story today. A 1% rate increase today has a much larger impact than it would have in, say, the early 80s.
Rates going up can strike fear into a lot of hearts but when you start to look at what that could actually mean, it’s often not as scary as you think.
That wraps up the last of the Bank of Canada rate announcements for the year so I wanted to thank you for watching & wish you & your families a very Merry Christmas & if you don’t celebrate Christmas, a very happy holiday season : )
Bank of Canada Rate Announcement – October
/in Misc. /by adminGood morning,
The Bank of Canada left rates unchanged at this mornings rate announcement so no changes to your variable rate mortgages or lines of credit. Some interesting points to take note of: the Bank is ending it’s Quantitative Easing program. Basically, that’s a form of tightening.
The other change is walking up their forecast for raising rates. For much of the pandemic the talk was raising rates in 2023. Over the previous couple announcements, that was bumped up to late 2022 & is now sitting at mid 2022.
What’s driving that? Inflation. The Bank expects inflationary pressures to stay elevated into next year & ease back to around their 2% target late 2022.
Energy prices aside, a lot of what’s driving inflation are pandemic impacted services. It’s been a challenge to fill job openings at the low end of the economy as people were paid to stay home, meanwhile a lot of people are sitting on more cash than usual & aren’t as concerned paying $5 more for a haircut or $8 more for lunch. Demand is up, there’s a lack of labor, people have the money so we see higher prices & that is expected to be a covid related problem that will dissipate over time.
On the other hand, look at, say, energy prices. With the green movement there has been a serious lack of development in that space. Of course, we all still need energy so the cost is higher & that isn’t something that will dissipate so quickly.
Every economic recession was lead by a monetary policy error. The thing to consider with inflation is that it is a lagging indicator. It is telling you something about the past, not the future. If you’re basing policy decisions off of the past, you’re late. Central banks tend to panic & raise rates too much, too quickly & too late & I think that is the risk to housing & the overall economy.
On real estate, fundamentally there is still a lack of supply generally speaking in Canada. Supply takes years to fix so the risk to prices going down is rapidly rising rates.
That covers today’s summary. If you’d like to talk more about what higher rates could mean for your mortgage, please get in touch & have a great day.
Bank of Canada September Rate Announcement – no change
/in Misc. /by adminGood 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:
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 : )