What if interest rates plateau or fall?

The Bank of Canada has just announced that it is maintaining its key rate at 5%. Is the rate hike over? It’s very likely. I believe the ceiling has been reached.

With its 10 increases which have propelled the key rate since March 2022 from a floor of 0.25% to the current level of 5.0%, the Bank of Canada, in my humble opinion, has caused sufficient economic damage and financial.

More and more households are suffering from acute over-indebtedness. Food banks no longer meet demand as the number of beneficiaries has increased in recent months. Mortgage payments jumped more than 30% during mortgage renewals. Interest costs on loans have exploded, bringing many households and SMEs to the brink of financial collapse.

Just over the last five months, according to unadjusted employment data from Statistics Canada, 488,000 full-time jobs were lost across Canada, including 191,000 in Quebec and the same number in Ontario. Although we have compensated for part of these losses with part-time jobs, the fact remains that a full-time job is worth gold compared to a part-time job.

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Thus, in light of the disastrous repercussions of the increase in the Bank of Canada’s key rate on the financial health of low- and middle-income Canadian households, on SMEs, on government debt, on the job market …enough is enough of the policy of budgetary tightening.

The time has come for the Bank of Canada to finally ask us to be patient with its aversion to inflation, which is now close to the 3.0% mark, very close to its famous inflationary range of 2 to 3%.

Note that the Bank of Canada monks continue to threaten us with the possibility of possibly raising its rate in the event of a resumption of inflation.

Damn these threats! In any case, if the Bank of Canada ever tightens its key rate again, it will only be 0.25%.

So… what to do during this period of rate capping?

With a mortgage?

If you need to renew your mortgage or take out a new one, the time has come to “take” the risk of betting on a variable rate mortgage. The 5-year variable term currently operates between 6.25% and 7.20%.

Why is the “variable rate” relevant these days? Because at the ceiling, as is likely the case with the Bank of Canada’s key rate, mortgage rates can only fall over the coming semesters.

However, as the variable rate mortgage varies according to changes in the key rate, the chances of seeing the variable rate drop from next year are very high.

People who prefer to have peace of mind by banking on fixed rate mortgage terms would benefit from opting for the shortest term possible, such as 1 year (6.8 to 7.0%) or 2 years (6.4 to 7.1%).

But if you have’saving…

Concerning ultra-conservative investments such as GICs (guaranteed investment certificates) or term savings, it is in your best interest to opt for the longest term possible, i.e. 5 years.

In the GIC market, it is possible to obtain up to an annualized return of 4.9% with large banking institutions. Épargne Placements Québec offers a 10-year term at a fixed rate of 4.65%.

In terms of 3 and 4 years, we can obtain an annualized rate of more than 5.0%.

And up to 5.4% annual return if you opt for 1 year or 2 years.

Moreover, over the past three years, investors have been burned with their investments in bonds and bond mutual funds as the market value of marketable bonds falls when interest rates rise.

Today, as rates appear to have reached their cyclical peak, bonds should offer good return potential.

But it remains a risky investment!

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