rates
02. rates
On the topic of interest rate increases, it’s not a question of if, but of when and by how much. The answers are most likely many months from now, and not a lot.
THE GREAT RATE DEBATE
One of the favourite past-times of market- watchers, economists, and housing analysts is to try to predict where interest rates are going to go next, and when it will happen. Quite honestly, most of us get it wrong most of the time. But the exercise of forecasting does seemingly take on more importance when the expectation for interest rate changes is one of upward movement. Our current interest rate environment strongly suggests that we should collectively anticipate rising interest rates. While interest rates heading into the pandemic were low— having followed a generally-downward trend for a period of 40 years, for a multitude of reasons—the overnight target rate set by the Bank of Canada, as an example, was only at 1.75%. Since the pandemic began, however, it has remained suppressed at 0.25%, where the Bank expects to keep it until the second half of 2022.
Five-year Government of Canada bond yields (addressed more directly in a few pages from here), plummeted in the early days of the pandemic thanks to both the Bank’s Quantitative Easing program (whereby the Bank was initially purchasing $4B of government debt each week) and the lack of appetite that private investors had for risk at the time. After a period when bond yields rose—flirting with the 1% threshold—they have since backed-off, currently hovering at around 0.87%. With inflation rising (explored in the next couple of pages) and the economy getting back on track, interest rates will undoubtedly move back up. Our expectation is for interest rates (from the overnight rate, to government bond yields, to mortgage rates) to move back to where they were prior to the pandemic within the next couple of years.
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