rates
02. rates
Inflation and interest rates are both up—way up, egad!— with their near-term trajectory still uncertain.
INTEREST RATES AND INFLATION: A SNEAK-PEAK
When governments and central banks around the world threw varying degrees of financial support to households and businesses in the early days of the pandemic, some people foresaw elevated inflation down the road as a natural consequence. Other people (including your authors), predicted a continuation of stable inflation. In hindsight, it’s easy to conclude that we all should have seen our currently-high inflation environment coming. So what actually happened? The truth is, a lot happened—and much of it was unpredictable in 2020. Certainly, historically dovish monetary policy and unprecedented fiscal interventions created an economic environment ripe for spending. However, what has led to the ongoing and elevated inflation challenge has been the nature of expenditures over the past 18 months (too much money chasing too few goods), ongoing supply chain issues both domestically in Canada and abroad, and a commodity price crunch ushered in by the
war in Ukraine earlier this year. These (for the most part) unpredicted, and unpredictable, dynamics have fueled a consumer price landscape that has yielded a Canadian inflation rate of 7.0% in August 2022—almost quadruple the Bank of Canada’s desired rate of 2%, and well outside its 1-3% bounds. The Bank of Canada has now, as of early September, raised its policy rate to 3.25%, the highest it’s been since 2008. This has, in turn, led to an increase in many interest rates, including bank prime rates, rates on lines of credit (including HELOCs), and variable rate mortgages. Notably, five-year Canadian government bond yields are not blindly marching upwards; in fact, they have fluctuated recently. This suggests that markets feel the Bank of Canada will get inflation under control in the near term, and with it bringing some relief to borrowers across the country.
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