Don’t Fear the Rate Hikes
Last week, I came across an article with this headline:
“Bank Of Canada Will Raise Rates 500% This Year, To Start Within Weeks.”
Pretty scary headline right? The article claimed that there will be five rate hikes of 0.25% this year. Even worse, these hikes will start almost immediately – meaning the first hike will happen at the first Bank of Canada announcement of the year.
That announcement happened yesterday. No rate hike.
Will Rates Increase By 500%?
I suspected it before the announcement, but now it’s all but confirmed: it is very, very unlikely that rates will go up five times this year. The Bank of Canada meets 8 times a year to decide on rates, the first of which just happened. That means that five out of the remaining seven meetings would have to result in a rate increase.
Nothing like this has ever happened before. There have never been five rate increases in a single year. To my knowledge, the most we’ve ever seen is three; and even then, those hikes were quickly followed by cuts. Why? It’s too much too soon. The economy couldn’t possibly absorb so much rate movement in such a short amount of time.
Yes, inflation is above the 2% target rate. But that doesn’t mean our economy isn’t still volatile. Emergency financial assistance is bound to run out sooner or later. Plus, Canada is expecting over 800,000 new immigrants over the next two years. Given these conditions, five rate hikes hardly even makes sense.
Will Rates Increase At All?
It’s safe to say that rates will go up this year. Rates this low only have one way to go. But there’s no chance we’ll see dramatic hikes like the ones described in the article I referenced above. Economist Benjamin Tal, who I hold in high regard, is predicting there will be three hikes this year. This still feels high to me – I believe we’re set for one or two. Either way, it will be nowhere near the clickbait forecasts of up to six rate increases.
So Should I Lock In A Fixed Rate Mortgage?
Just because rates will go up slightly doesn’t mean they aren’t still very, very low. Anything under 3% is basically free money. Right now, variable rates are hovering around 1.45% while fixed rates have climbed to around 2.84%. It’s unlikely that the current variable rate will rise to the current fixed rate any time soon, meaning you’ll be throwing thousands of dollars out of the window if you go with fixed.
The Bottom Line
I’ve said it once, and I’ll say it again: bad news sells. Good news gets scrolled by. The Canadian housing market is in a strong position, and rates are set to remain relatively low for the foreseeable future. So enjoy this time. Pay off your debts. Bolster your investments. Just don’t make a huge financial decision based on a headline designed for profit.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis: 416-224-0114; firstname.lastname@example.org
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