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Interest Rates Outlook 2022

January 21, 2022

It appears that after years of declining interest rates, The Federal Reserve in The United States, better
known as the “Bank to the World”, we begin a series of rate increases, starting in March this year. When
they cough, we in Canada catch their cold. The Bank of Canada could start to increase rates in January.
This is not written in stone. Our governments face a number of challenges but the U.S has stated that
inflation is the problem and that the virus is no longer front and centre. It’s time to stop the stimulus,
government programs and money that have flooded the market and start moving people off
government support. The U.S economy has not been shut down. The Fed governor suggested that the
pandemic isn’t as frightening as inflation.

Raising interest rates, whether the Bank of Canada prime moves 4 or 5 times this year will slow down
the economy. The inflation we are seeing in food, housing, including rent, affects every Canadian.
Don’t forget that consumers are responsible for 73% of our economic activity – we are the engine keeps
our country growing. As you increase interest rates, consumers simply change their spending behavior
and curb demand. The benefit of rising interest rates is that prices of goods and services should retreat
as the year progresses.

Can our economy handle higher interest rates? That is a great question. In addition to inflation, we have
one other problem looming. Our economy and that of our neighbor are at or close to full employment –
it’s a tight job market which puts further pressure on wage inflation. This, coupled with brisk demand for
goods, disrupted supply chains and various shortages have pushed inflation to its highest readings in
almost 4 decades. Core consumer prices, which excludes food and energy, reached 4.7% in November
and 7% in December, year over year.

This paints a rather tricky picture for both governments. The Bank governor ended his interest rate
review by saying that he “hopes there will be a return to normal supply conditions” which will take some
pressure off pricing. If inflation persists, raising interest rates is the ” tool left and in the toolbox”.
What does this mean for MonsterMortgage.ca clients in 2022? Well, currently the variable rate option
at 1.5% seems to be the product of choice up to this year. With a simple 3 months interest penalty, it
offers the flexibility that client want. The dilemma is what to do moving forward. The 5 year fixed rate is
currently around 2.75%. The prime rate in Canada would need to move 5 times for the variable rate to
be equal to today’s 5 year rate. That would normally take a number of years but given what has
occurred as written above, it could all happen in 2022. Baring an additional economic fumble, Variable
rate mortgages will end the year at 2.50%. The moves will be gradual but with the pandemic in the rear
view mirror, rates have nowhere to go but up.

Your Monster Agent has ideas on how to capitalize, even in a rising rate environment. Sometimes peace
of mind and a guarantee long term payment is the right answer during volatile times. Call us for
independent advise on your current mortgage.

Don Bayer
President, Founder and Principal Broker,
416-480-0234 ext. 222