Risk of Rate Hikes in Canada
Table of Contents :
Bank of Canada.
Hikes Coming.
Rate Hikes Working.
Market’s Expectation.
Impact on You.
My Perspective.
Disclaimer.
Are you worried like many that interest rates will go up shortly.
Surely inflation has come down but still higher than mandated 2%, so Bank of Canada might raise rates by 0.25% in the next meeting.
Bank of Canada
Bank of Canada’s governor stated that further rate hikes might be required, if they determine that inflation is still stuck significantly about 2%.
Usually rate changes are based on multiple factors like economy job market and of course inflation, because all of them are interconnected.
When they find inflation is sticky, they move rates quickly and significantly to cool the economy as evident from their recent moves.
Fore sure Inflation has eased off from a peak of over 8% to about 4.3% now, but still more their mandated 2%.
So I think Bank of Canada might raise rates by 0.25% in June.
Hikes Coming
Economic experts are predicting another rate hike from Bank of Canada.
For sure another possible rate hike next month could pose significant challenges for some fellow Canadians, but surely it is less dangerous than having a higher inflation for extended period of time.
Having kept bank’s overnight lending rate steady at 4.25% since March, experts are divided that a mild rate hike is coming in June.
Reason for rate hike is the latest data, where inflation in April is slightly more than March.
But there are experts who are predicting a no change stance from Bank of Canada, but they are in minority.
Rate Hikes Working
If the intention of Bank of Canada was to control rampant inflation, they were successful in cooling off the economy while bringing down inflation.
When borrowing cost for household and business goes up, they try to cut costs and the job market becomes very tight.
Consequently, people are left with less money in their pockets to spend which drastically reduces their discretionary spending, that has a calming effect on inflation.
At the moment inflation is still high from its target range, and it looks little sticky to me.
I think rate hikes have done their intended work so far, but we need more tightening to bring inflation further in check.
Market’s Expectation
Bank of Canada kept their rates unchanged when the Fed increased rates marginally, but financial markets are now taking about a possible small rate hike in Canada.
Our central bank paused to assess how people and businesses are coping with higher borrowing costs, but sticky inflation around 4% is making economists believe about a possible marginal rate hike.
In the backdrop of global banking liquidity crunch, talk about rate hikes and inflation has taken a backseat at least in the US.
Recent collapse of Silicon Valley Bank, and liquidity crisis at Credit Suisse forced central banks to pause their monetary tightening, while reassess its effect on economy and inflation.
Impact on You
Higher lending rates increase cost of borrowing, while impacting investment performance and savings rates.
If you have a HELOC or line of credit, revisiting you liability terms to ensure debt servicing is a smart thing to do.
People with car loans student loans or even mortgages are going to get affected, as your payments are surely going to increase depending upon the type of loan.
Rising rates will also impact your stock investments, retirement funds and even yield on bonds that you have in your investment portfolio.
I believe increase in rates rebalances the economy, because when rates go too low, demand outstrip supply thus creating inflation.
My Perspective
I believe Bank of Canada’s path to 2% inflation target is bumpy and uncertain.
Efforts to tame inflation by increasing rates is understandable, but there are many pitfalls which can take economy in an un-intentional direction.
It is clearly evident as banking liquidity issues crop up globally, and war in Europe is not helping either with higher energy prices.
We have a relatively strong job market with increasing labour costs, that refuses to cool down.
All this brings inflationary effect on economy, that too when Bank of Canada is trying to control inflation by raising rates.
I think next month we are going to see a marginal rate hike to cool things further.
Disclaimer :
As a disclaimer, I’m not a financial advisor please consult one before investing based on your personal financial situation.