Significant Interest Rate Increases will be Painful
May 1, 2022
Last week the Bank of Canada increased interest rates by half a per cent. This is the largest interest rate hike in two decades, writes Peter Watson.
Plus, there were warnings additional rate increases will be announced.
The BOC also announced it will stop buying federal government bonds which it has been doing to keep interest rates at an artificially low rate. That too will cause interest rates to rise.
The target rate for inflation is between one and three per cent. As of February, inflation was 5.7 per cent, which is the highest during the last three decades.
The significance of these actions is the severity. My observation was the main strategy used in the past to control inflation was warning the public that higher interest rates would come.
The hope was that people would stop borrowing and overspending because of the threat of future higher borrowing costs. That did not work.
Neither did the last rate increase of one quarter of one per cent.
The question is how do we live in with significantly higher interest rates? For many that will be difficult.
Many live from pay-to-pay with not any extra to spare. Inflation meant daily living costs had already increased so higher borrowing costs could be unmanageable.
Variable rate mortgages mean that higher mortgage costs can happen immediately. Some households will have to curb spending which hurts business that sell to consumers.
We encourage you to plan how to navigate household spending in this era of increased borrowing costs.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Watson provides wealth management services through Watson Investments. He can be reached at www.watsoninvestments.com