Well, They Raised Interest Rates. What Happens Now?

Thursday, July 7, 2022

May-12-2022

Last month I wrote about the state of the housing market in Canada. Housing prices in Canada in the last couple of years had been increasing dramatically – some would argue dangerously. Along with the overheated housing market, we are now witnessing inflation rates that haven’t been seen in Canada in close to 50 years.

So, to deal with these twin crises Tiff Macklem, the Governor of the Bank of Canada, announced an increase in the prime rate of 50 basis points on April 13. This raises the Canadian prime rate to 1% and is the single largest rate hike in over twenty years.

The inflation rate needs to come down

Macklem explained that the Bank of Canada had determined that “Inflation is too high. We need higher interest rates.” He blames much of the current inflationary environment on global events – specifically the war in Ukraine. This has driven up the price of commodities like oil.

The Bank of Canada want to manage expectations

According to the governor, one of the other factors affecting the bank’s decision was their need to make sure Canadians don’t begin to expect these inflationary conditions to continue. Once our expectations become fixed, breaking the inflationary cycle will become increasingly difficult to break.

We’ll have to see just how long the war in Ukraine continues and what its long-term impact on the world economy will be. Clearly Macklem is hoping these pressures ease soon and allow the Canadian economy to return to the Bank’s expected inflationary rate of about 2%. Current rates in the range of 6% are simply unstainable.

It seems interesting to me that things like the price of housing in Canada (which I wrote about last month) and the ongoing challenges to the global supply chain caused by COVID-19 got very little mention in the clips of the Governor’s announcement that I watched.

How much of the inflation we are currently seeing would still be hitting the Canadian economy if Putin had never decided to head for Kyiv? Would there have been any announcement or rate hike if we had never got to know Volodymyr Zelenskyy?

What is the impact of inflation on your pocketbook?

You and I know that inflation has hit Canadians hard in the spring of 2022. You just have to go fill the tank, wondering if you can afford to get an EV after all, or look around the produce department deciding between romaine and iceberg lettuce.

These rate hikes have already had a cascading effect on the price of borrowing. Mortgage rates have increased, and the housing market has begun to cool off. AS always, we will have to watch carefully to see how the economy continues.

If you think it’s time for a re-evaluation of your investment products or your overall economic expectations, let me know. As always, universal conditions affect each of us differently. You can only decide how to decide how to proceed by examining your own circumstances. Go ahead, let me help.