How long are interest rates going to stay where they are? When are they going back down? Or, can they go higher?
Of course, I don't have a crystal ball (as long-time readers can attest to, when it comes to my predictions!)
I do believe, however, that longer-term interest rates will remain elevated relative to pre-Covid times when mortgages were being offered at below 2%, and on variable rates, or even less.
But don't take it from me. On Thursday, the deputy Bank of Canada governor, Paul Beaudry, said that amidst remaining uncertainty, risks to long-term real rates are tilted to the upside. On Wednesday, the Bank of Canada lifted its short-term policy rate one-quarter percentage point to a 22-year high of 4.75%. The increase, following a four-month pause on rates, came after the bank determined that monetary policy wasn’t sufficiently restrictive to bring supply and demand back into balance, and return inflation to its 2% target. Some anticipate another quarter-point lift in July.
I find Mr. Beaudry's lack of attendance at the press conference odd. Apparently, Ottawa hasn't received the "back to work memos" that most cities in North America have …
Mr. Beaudry noted that long-term interest rates in Canada and most other advanced economies fell steadily in the 25 years preceding the pandemic. He attributed this to a mix of aging populations, China and other developing countries joining the global economy, rising inequality, and fewer attractive investment opportunities for business.
Trends, of course, take a long time to become apparent, and part of accepted wisdom. I do believe that there is a reversal going on that will affect investing and interest rates. In most large countries, including Canada, the U.S., and certainly Europe and China, large portions of the population are no longer saving for retirement but are now retired. During this period, they typically start spending their savings, and this can be a source of downward pressure on global savings, and upward pressure on real rates.
Higher interest rates though aren't entirely all bad: as I've mentioned in the past, for the first time in many years, interest-bearing notes, and other instruments are offering yields that a few years ago were unimaginable in a sub 2% mortgage environment.
I want to thank a colleague for sending me an insightful clip. Golf predictions have often been a way for me to sign off my weekly commentary. I’ve reduced those golf predictions over the years and am going to reduce them even more going forward. Whether you’re a golf fan or not, this week’s news of this merger has big implications, beyond just golf.
Alas, it is the Canadian Open this weekend, and RBC is the sponsor. It is hosted in the GTA, about a half-hour drive from my office. So, I would be remiss if I didn’t make a prediction this week. In a monumental cosmic karma, Rory McIlroy is going to win (well Rory, or Canadian Cory Conners).
Have a great weekend.