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No one expected the Bank of Canada to hike rates by 1%. Here’s what we can do now.

  • 8 min read

What Happened on Wednesday?

Yesterday’s Bank of Canada’s announcement was the quintessential ‘expect the unexpected’

The daily activity on my phone and inbox indeed spiked a little but nothing screaming a 4-alarm fire.

Here is what you need to know

  • It was the biggest rate hike in 25 years.
  • It was a full 1% or 100 basis point increase.
  • It was higher than the US Federal Bank rate increase last month.

Key points mentioned in the press conference

  • Entrenched inflation is an ongoing threat.
  • Wage spiralling is of concern. (This is where inflation leads to higher wages. Higher wages leads to even higher inflation and doesn’t’ stop)
  • ‘Front-loading’ this increase or in other words, sending a ‘shock’ to the economy was necessary.

Inflation: An ugly past and present

We know inflation is a destructive force.

Every nation that has undergone prolonged serious inflation has experienced the same ending.

Economic and political collapse.

Yesterday’s extraordinary hike sent a ‘forceful’ message.

We need to grab hold of inflation before it gets further out of control.

The Bank of Canada won’t stop until they bring inflation down back to 2%.

It’s currently hovering at 8% which is the highest we’ve seen in 40 years.

In fact, it’s higher than I’ve ever seen in my lifetime.

And to that point, for most of us reading this blog post.

The US posted their CPI (Consumer Price Index) figures yesterday.

Their inflation figures came in higher than expected at 9.1%

Raising rates and their consequences

We know that lowering rates and printing money stimulates the economy and spurs growth.

But raising interest rates and money tightening leads to another consequence.

History has taught us this lesson.

It typically leads to recession and high unemployment.

Let’s go back in time when another Trudeau lead the country.

In 1969, inflation in Canada hit 4% under the leadership of Pierre Trudeau.

Two opposing party leaders (David Lewis and Robert Stanfield) criticized the PM.

Fanning the flames about the Liberal’s easy money policies that caused the inflation.

Pierre Trudeau came out and spoke.

“We have to tackle inflation and we must raise interest rates and tighten the money supply.”

The money supply tightened; interest rates increased.

Then the inevitable followed.

The cost of capital (money/credit) for businesses became too expensive.

Companies then restricted expansion, they stopped hiring, unemployment began to rise and of course…

Mortgages on homes became more expensive.

Like clockwork, the two opposing leaders then criticized the PM for raising rates and warned of a depression.

The newspapers sensationalized the warnings of pending economic doom.

What happened next???

Backbenchers dealing with their constituents about the economic consequences pressured the PM.

Within 90 days Pierre Trudeau reversed his money tightening and pivoted.

Other forces are at play during this cycle that are beyond the Bank of Canada’s control

  • Inflation is a global problem which has a trickle down effect on goods imported.
  • Global supply chain issues are ongoing.
  • China is still dealing with a Covid problem.
  • Russia and Ukraine conflict is shutting down oil and grain production in Europe which creates further economic fallout.

The Bank of Canada can only do what they can do now – slow down our own economy – to prevent higher inflation.

With the only tool they have.

Raise interest rates and stop the supply of money.

For now.

But Governments and Central Banks have been known for one thing.

They don’t just slow the money growth as mentioned.

They also speed it up as well by printing and spending more money and lowering rates.

In the case of the Pandemic, they had no choice in order to stop an economic disaster which would have been far worse than high prices we face today.

And so another cycle continues.

See the graph published in the Financial Post yesterday that talks to this.

Better yet, read the article.

This a cycle just like the ones in the graph above.

And will most likely happen again.

What are the options left for us in this situation?

History may not exactly repeat itself but can give us clues to what may happen next.

More hikes appear to be on the horizon, but the long term looks like lower rates could be in our favour.


Things are going to slow down.

We haven’t seen this cycle play all the way out yet.

It’s anyone’s guess now but I as a consumer will favour the trend line as in the past.

With the understanding that we should expect some more increases in the near term.

Which you and I cannot control.

So, the only logical thing we can do right now is focus on what we can control

  • We can control our payments going up further by locking into a 5-year fixed term
  • We can break our variable mortgage with a small breakage fee and move to a shorter 1-2-year term if we don’t want to lock in for longer than that. Many economists are predicting fixed rates to come back down with in the next year or so.
  • We can extend our amortizations back close to the original commitment.
  • We can control our spending, and manage the increases as they come.
  • Find ways to increase our household income.
  • Reduce our household expenses.
  • Look at our fixed payment debt and consolidate if possible.
  • Factor in a higher payment on our current variable mortgage to offset estimated increases and work that figure into our savings for now.
  • Part with something we don’t need that might be dragging us down financially.
  • Hold on to some extra cash we have saved during the pandemic and use that to manage increases as they come.
  • Control our spending. I am saying that again on purpose.
  • Hold off. Wait a while before making any big purchases.

As side note, remember lumber prices skyrocketing during the pandemic??

Guess what?

They are back down again to pre-pandemic levels.

This gives me hope.

I saw a clearance sign at the local Home Hardware on stacks of deck lumber last week which caused me to double take.

Undoubtedly this rate hike will have an intended BIG effect and as I said, the Bank of Canada has no choice for now.

Bruno, what action are you taking as a consumer with a variable rate mortgage?

As for locking in my Scotiabank Flex Value variable rate mortgage, I am not.

Like investing, I am in for the long haul.

Riding this cycle.

Just like an investment cycle that goes up then comes down and repeats again.

Yes, my payment goes up each time and I have to contend with that, but my balance is still reducing and that’s fine by me at renewal time.

I know with each payment, my intended principal portion isn’t shrinking and it’s attacking my balance.

My amortization continues to come down with each payment.

And I firmly believe over the long-term I will be saving more and better off staying in a variable rate mortgage.

I am still in control.

Even with all the predicted real estate slowdowns on the horizon that could effect my household income

  • I am facing the higher costs and will find rational solutions to make it through.
  • I am watching for market opportunities.
  • I will continue to look at ways to increase my net worth.
  • I am not taking on any debt that will not assist in my net worth increase
  • I will never rely on one source of income for the rest of my life.

That is MY plan as many of you asked yesterday.

Yours might be different.

So might your risk tolerance during these times.

My goal is to help you make a decision with what we know so far and what others can only speculate on given some historical evidence.

Don’t remain stagnate and worry about what ‘could’ happen and focus on what you can do right now.

Have a plan.

If you don’t have one, make one.

Be rational and do smart things you can control.

Like I said on the last post…

Focus on the best investment you can make right now.

That is, you.

Future-proof yourself right now.

Reduce the outside noise.

And navigate this moment and future ones better equipped and educated.

I am always a click or call away if you need to chat or look at solutions if you feel it’s time to do so given yesterday’s announcement.

I will offer as much information I can to help you figure out a plan.

Your peace of mind is important to me.

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