BoC's Massive Rate Hike: What's next & where do we go from here?

Shocking even the most seasoned economists, the Bank of Canada raised the overnight policy rate a full 100bps bringing prime to 4.7%.

What does this mean, what's next and where do we go from here? Keep reading.

Most experts were calling for a rate increase of at least 0.75bps well before yesterday's announcement. A 100bps point increase is obviously more but an anticipated 0.75bps hike gave people some time to prepare.

So what's next?

The market is already anticipating that Prime could reach 5.2% to 5.7% by year end and that we will likely be contending with inflation (currently around 8%) until at least 2024 when it's expected to return to the target 2%. Whether we get there via another big hike or a series of smaller ones remains to be seen.

Where do we go from here?

Inflation is clearly not "transitory" as the BoC said throughout much of the COVID pandemic. They are on record as saying interest rates would remain low until at least 2023 and yet here we are with Prime having risen from 0.25 to 2.5 in six months. It's hard to believe the soft-landing they keep insisting on will be possible. The unemployment rate has never been lower. There are currently around 1 million job vacancies in Canada driven largely by consumer demand for good and services. The Bank's goal is to raise rates enough the slow said demand and thus eliminate or reduce job vacancies. Recession concerns continue to grow. It's almost impossible to makes changes in one area of the economy without there being fallout in other areas.

What's the best course of action?

If you're considering locking into a fixed rate, those are sitting at over 5% so if keeping cash flow freed up is your goal, that's likely not your best option. As well, we are seeing a lot of volatility in the bond market, which is what drives fixed rates. Just last week rates dropped by 30bps and then rebounded by almost as much by the end of the week. Playing the timing game for fixed rates isn't something many people have an appetite for because once you've locked in, that's it.

HELOC holders carrying a balance of any significance will especially feel this rate hike as this brings most HELOC rates to around 5.2%. Line of credit payments along with high interest credit cards can have a major impact on cashflow and it is likely a good place to start when it comes to eliminating or reducing debt.

The best plan is going to be one with a clear strategy. There is no need to panic but let's not be naïve about what's to come. The math is important (i.e. are the costs to make changes worth it? will cash flow increase enough to off-set the costs?) but so is predictability and peace of mind. There is no "right" solution that will work for everyone.

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