October 2021 Bank of Canada Key Rate Announcement

It has been a while since we have written an interest rate note because of the seemingly everlasting pandemic conditions which have created a “no news” cycle for interest rates.  The talk of interest rates climbing has recently become more prevalent and a commentary on this is now worthy.  The Bank of Canada (BOC) yesterday in their scheduled announcement did not change their key overnight lending rate and we expect the large financial institutions to follow suit with their prime interest rate.  The BOC did however announce the end of their current quantitative easing program (injection of cash into the financial system).

Inflation is proving to be a stickier issue than central banks once thought. With soaring energy prices, the more troubling economic prospect of stagflation, a bad word from the 1970s, which has entered the economic conversation of late in financial markets; but a lot of analysts feel that the risk is not significant.

Stagflation’s classic demonstration in Canada (in the 1970’s), was inflationary conditions in concert with high unemployment.  Generally; Stagflation is defined as inflation above the central bank’s target rate while the economy slows, i.e. economic stagnation coupled with rising inflation.  Inflation is normally associated with economic expansion, especially when a nation’s economic capacity for production and services are at, or near the maximum.

Stagflation causes central banks a big problem: raising interest rates to fight inflation will just stifle economic growth more. The experience of stagflation by consumers is that it causes things to cost more while their incomes decrease with rising unemployment.

We believe that we are still in an overall lower long-term interest rate environment but with medium-term risk, certainly, nothing we have not been through before.  There are varying opinions on when interest rates will start on a definitive path upward, some say early 2022 and some say later in 2022.  Governments will be loath to have interest rates rising as their debt loads exiting the pandemic will be onerous.  Call us for further discussion of your own personal circumstances for specific advice.