If you’re anything like me, you’re weary of the interest rate/inflation topic. However, it’s a necessary conversation if we want to better understand why our portfolios behave a certain way when rates fluctuate. I’m not going to dive more deeply into that part of it today, but I do want to talk about the history of interest rates over the last three decades and the psychological and real impact ultra-low rates created for many.

Below, I’ve included the Bank of Canada’s policy rate history, going back to 1992. I particularly like this graphic because it starkly illustrates how much higher rates were through much of the ‘90s into 2001. There was another uptick again through 2004 to 2007, and during 2008, all bets were off as the financial crisis hit. For the next 13 years, (2009 to 2022), we experienced predominately historical lows where we hovered between ~1.5% and close to zero. I won’t go into all of the reasons why, but this was an abnormally long time by North American standards.

Now imagine you’re someone “coming of age” between 2009 and 2022 and all you’ve ever known is this low rate environment. It then stands to reason, as the Bank of Canada began their rate hike campaign 2 years ago, you’d find this very unsettling. We can all rationally look at charts and graphs, but when you’re in a situation of this nature that you’ve not encountered before, it can be jarring.

Then there’s the billions of “new” dollars that were borrowed (mainly between the 25 – 65 age range), because money was “cheap”. We’re talking more expensive cars, homes, cottages, travel, appliances of all sorts, and most obviously, a massive increase in luxury goods spending. As an aside, I don’t think it’s a coincidence that the huge amount of spending on what I’ll call “unnecessary items”, also coincided with the advent of social media platforms like Instagram and their targeted ads.

While I think there will always be a faction of society that wants what they can’t afford, we know from the data, this recent inflated spending cycle is now unwinding, albeit slowly. This is precisely why the tightening of monetary policy is so important.

December marked the third consecutive month the Producer Price Index (PPI) declined. This came in below expectations for a 0.1% increase. Goods prices were down 0.4% in December with the majority of the decrease coming from a 12.4% decline in the cost of diesel fuel. Food prices decreased 0.9% with the cost of eggs falling 20.5%, partially reversing the 71.2% increase in the cost seen in November. Wholesale passenger car prices also fell 3.0%.

I’m not going to tell you I know when rates might start coming down but I know they will. If I were to hazard a guess, I’d say this coming fall. I am going against the majority of analysts who have moved their forecast for a cut from March to June, but I think we need to manage our expectations here. The Bank of Canada and the Fed are going to be ultra-cautious. That being said, if it happens sooner, I’m happy to be wrong.

As always, I’m happy to take on new clients! A second opinion and fresh perspective costs nothing and can be invaluable, so get in touch if this is you.

Libby

 

 

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