Average inflation targeting… remember this term.
Last week, I participated in a webinar featuring Economist Dr. Peter Andersen. While there was a lot of information covered, today I want to focus on a couple of key areas.
- What can business expect in 2021?
- Average inflation targeting and why you should remember this phrase.
Let’s start off with some of the good news Dr. Andersen brought forth. I think we can all use some of that right now. How about an outlook that includes an Economic boom? Yes, economic boom. This will surprise many people, but we can expect there to be positive economic growth for 2021, 2022, 2023 and perhaps beyond. One of the key reasons can be found in simple supply and demand. With quarantines and other restrictions we have seen a reduction in the supplies that are available, putting supply firmly behind demand. Manufacturing has been impacted, supply chains disrupted. Demand has not gone away or at least has not decreased as fast as the supplies have. Just look at lumber.. try buying wood.. if you can get it, it’s increased in price significantly. How about appliances ( I went to buy a freezer and they told me 3 to 6 months delivery time… wow!). The list goes on.
With the vaccines being rolled out, there is some light at the end of the tunnel. We will begin to see the workforce able to return to pre-pandemic levels and production able to follow suit.
You may recall in my article back in March, at the start of the pandemic, I quoted Goldman Sachs, forecasting for a full recovery within 6 months. Most people thought I was crazy to publish that, but it just made sense. As Dr. Andersen affirmed in his recent webinar, the economy was hit by forces outside the system. This wasn’t some financial crisis or Ponzi scheme or junk bond fraud or subprime mortgage crisis, like we’ve had in the past 30 years (by the way, those all took place in the US…. and I apologize to my American friends, but with so much of the financial markets tied to the US, most of the financial disasters have come out of the US as well).
I knew that we would come out of this much sooner than everybody thought as history has told us, time and again, after any big crisis there is a recovery.
Now let’s talk about Average Inflation Targeting (AIT). Remember this phrase. Central banks around the world have adopted this and with the US now joining in, Canada is going to be right behind them.
What does this mean? The Bank of Canada sets their monetary policy based on inflation. The target rate of inflation has been between 1% and 3% for as long as I can remember, with 2% being the optimal figure. If inflation went above 2% for an extended period of time, you could expect to see the Overnight rate increase. This rate directly affects the Bank Prime rate, Variable rate mortgages, and commercial borrowing products.
But the pandemic has changed this. Now, the government will measure inflation over a number of years (no one is saying how many years). What does this mean? Well, history offers some answers. Look back at the last 10 years, the rate of inflation has rarely averaged over 2% over an extended period of time using the Bank of Canada’s Consumer Price Index.
With our Federal government spending $350 billion plus in emergency spending, it means they will need to pay for it at some point and low interest rate debt is the most likely way to afford this.
The BOTTOM LINE…. interest rates aren’t going anywhere anytime soon. We are going to enjoy low rates for quite some time. Three, four, five years.. maybe longer. If you want to borrow money, now is the right time. Want to buy another property, do a reno, borrow to invest? This is the time. Borrow low.
Oh, and here’s a PRO TIP… don’t jump for just any low advertised rate. I’m seeing way too many people get burned by getting into a mortgage that is full of restrictions, inflated penalty calculations, or limitations on borrowing. Things have changed and so have mortgages… and in a big way. Speak with an experienced unbiased professional. Reach out to a quality Mortgage Broker that can guide you properly.
As always, I welcome your comments, calls and questions.
Steve Garganis 416 224 0114 email@example.com
Your best interest is my only interest.
Steve Garganis View All
As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.
Leave a Reply