A Stand-Off Between the Bank of Canada and the Government of Canada

To start off, a bit of good news for once: the average 5-year fixed rate mortgage has fallen over the last two months. Some qualified borrowers are now able to secure a rate as low as 4.89%. But of course, it is good news, so you probably didn’t see it reported in the mainstream media. 

Here’s what you likely did see: the overnight rate went up by yet another 0.50% on December 7 to 4.25%. Another staggering increase at a time when most experts predicted rates would start levelling out. Not only is this rate hike significant – it’s actually record-breaking. A whopping 4.00% increase in just 9 months took us from some of the lowest rates of this century to the highest.

So why hasn’t Macklem eased up yet? Hasn’t the economy cooled enough? In my opinion, there’s something bigger going on that’s making Canada’s economy a lot messier than it needs to be. 

Trudeau vs. Macklem

The Bank of Canada and the federal government are entirely separate entities with the same mandate: to ensure the health of the Canadian economy. But what happens when the two entities aren’t on the same page on how to achieve that end?

That’s essentially where we’re at right now. The Bank of Canada is doing everything in their power to bring the inflation rate down to 2%. It’s currently at 6.9%. By raising interest rates, the BoC is attempting to increase the cost of debt for Canadians to limit the amount of disposable income they have to spend on consumer goods and services. To put it simply: they’re trying to slow the economy by limiting spending.

Meanwhile, the Trudeau government seems to be promoting more spending. They’re literally handing out free money to more people than need it. Not only has this doubled our federal debt in a span of two years; it’s also worked against the BoC’s strategy of cooling down inflation. Add in an aggressive immigration quota of 500k to 700k annually, and you have more spending than ever at a time when we need the exact opposite.

What This Means For Canadians

This showdown between the two institutions has no doubt stymied the recovery of our economy. It’s certainly why home values have flatlined, and why inflation hasn’t moved as much as it should. The longer we see these high rates exist, the more stress consumers and businesses will experience in the weeks and months ahead. 

The Bottom Line

I’m still recommending variable rate mortgages, or short term fixed rates for 1 or 2 years. We should see rates start to level out and eventually fall as soon as fall 2023, and when that happens, you don’t want to be stuck in a high rate you can’t get out of.

One thing is for sure: Trudeau needs to get on board with the BoC’s plan to cool inflation. Social programs are important, especially during hard times like the pandemic. But these programs should rarely exist in the long term.

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; steve@canadamortgagenews.ca