This is a common question since the Bank of Canada’s key rate went from 0.25 percent in March to 3.75 percent on October 26. It should be noted, though, that the last six increases in interest rates make this one of the quickest bull markets since the 1970s.
This is not a small thing, and it has a direct effect on many households that have to renew their mortgage loan or who have variable-rate loans and see their monthly payments go up by a lot, as shown by the stories my colleague Stéphanie Bérubé has collected.
As we all know—this has been in the news every day for a year—the high inflation that has become a permanent part of the economy is also having terrible effects on people’s and businesses’ daily lives.
With an inflation rate of more than 5% at the beginning of the year and more than 8% in the summer, which hadn’t happened in decades, the Canadian government had to take a strong stand against the problem to stop prices and wages from spiraling out of control.
Technique Many consumers would have preferred
In order to stop this inflation, it was necessary to take action right away and use the bandage technique. Everyone knows that the best way to remove a dressing that is stuck to the skin is to pull it off quickly and in one go, even if it hurts.
Zip, it hurts, but you don’t think about it after that. Taking it off gradually, millimeter by millimeter, is a useless and ineffective method. We make the pain last longer, and the bandage always sticks to the skin…
Since we’ve had unchecked inflation for a year, we needed strong action that matched the evil that needed to be fought. By ordering big increases of 75 or 100 basis points, the Bank of Canada is trying to bring the inflationary curve back to earth as quickly as possible while hoping that the economic slowdown will be smooth.
A plan for borrowing
The latest 50-point increase in the Bank of Canada’s key rate shows, however, that the people in charge of money are starting to want to slow down the size of future increases.
Last Wednesday, the US Federal Reserve raised its key rate by another 75 basis points. However, its chairman, Jerome Powell, made it clear that the US central bank was likely to slow down the rate and size of future increases, starting with the next meeting of its monetary policy committee in December.
So, it looks like the Band-Aid method is about to run out of steam, but interest rates are not about to start going down. We have a long way to go before we can hope for an initial loosening of monetary policy in both Canada and the United States.
When we know that rate hikes take at least 12 to 18 months to have a full effect on the economy, it’s easy to see that the current situation of relatively high rates will continue as long as inflation doesn’t return to the 2 to 3 percent range that the monetary authorities expect.
The rate hikes of the past nine months, on the other hand, have had a direct effect on households that took out a variable-rate mortgage loan by mistake. Those who have done this in the past few years were given bad advice by their bank, in my opinion.
Since 2020, interest rates have been very low because of the pandemic, which has forced central banks to be more flexible than usual.
I thought it was the best time to get a long-term fixed-rate mortgage because the rates were not going to stay at their current level, which was one of the best in history.
In the late 1980s, when many people got their first mortgage, the average interest rate was around 11%. We agree that the prices were not the same, but the amount of money you had to pay in interest was still much higher than it is with the “high” rates we have now.
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