Pattie Lovett-Reid: Don't panic over higher rates
The day has arrived. It has been seven years dating back to September 2010 when we last saw the Bank of Canada raise interest rates. Today there is an interest rate announcement at 10 a.m. ET and over a 92 per cent chance we will see an increase by 25 basis points.
Why is this happening now? The justification cited seems simple: The past rate cuts put into place to support the economy against falling oil prices seem to have done their job. It is time to move off these emergency low rates and get back to a normalized rate environment.
The data supports this thesis based on the above-trend growth, an unemployment rate of 6.5 per cent a level not seen in over eight years, stronger gains in exports and blockbuster job reports. But, to be fair, it isn’t all great news. Inflation has been decelerating in recent months and hovering around 1.3 per cent well below the Bank of Canada target of one-to-three per cent and while job growth appears strong, wage growth has been weak, up just over one per cent during the past year.
Before you think the sky is falling let’s put this into perspective. If the bank moves only 25 basis points that sort of movement really isn’t a big deal. What is a big deal is the turning of the tide and the higher rates that could be coming.
To the savers out there, it isn’t time to get too excited. It is going to take further rate increases to move the needle to make a significant difference to your financial situation.
On the other hand, if you are a borrower and have a variable-rate mortgage or lines of credit tied to the bank’s prime lending rate you may be considering options and thinking about locking in your rate.
Something to consider: Fixed-term mortgage rates have already started to move higher as they are tied to the bond market not what the Bank of Canada does today.
The reason for this is that mortgages are considered to be long-term funding commitments. However, that doesn’t mean you shouldn’t speak to your financial advisor and do the math. Determine if locking in your mortgage or consolidating debt makes sense, how much more your borrowing will cost, and calculate where the money is going to come to pay for it. Recognize that in some cases your monthly expenses may not go up. However, the fact is you could have the debt longer than you expected as more money goes to servicing the debt than paying down the debt.
Your personal financial situation will be influenced more the by the pace of rate increases than a 25 point move and it may take time for the Bank of Canada to feel confident that the economy can withstand further increases. There are still uncertainties given the current price of oil, the upcoming NAFTA negotiations and even results of measures implemented to slow down the housing market.
Before you panic about higher rates, understand they are still unbelievably low. However, there is a feeling the tide is turning... albeit slowly.