That’s the question we’ve heard a lot since the Bank of Canada’s interest rate surged quite suddenly from 0.25% last March to 3.75% since October 26th. However, it should be noted that the six straight rate hikes we just absorbed represent one of the fastest bull cycles since the 1970s.

This is significant and directly affects many households that need to renew their mortgages or have taken out adjustable rate borrowers whose monthly payments regularly increase sharply, according to testimonies collected by my colleague Stéphanie Bérubé.

As we know – the issue has been in the headlines for a year straight – the high inflation that has taken hold of the economy is also having a devastating impact on the everyday lives of citizens and businesses.

With inflation beginning the year at over 5% and surpassing 8% in the summer at a rate not seen in decades, Canada’s policymakers had to tackle the problem with determination to prevent inflation from spiraling out of control wage spiral.

Therefore, in order to reduce this inflation, it was necessary to act head-on and use the bandage technique. Everyone knows that when it is necessary to remove a bandage stuck to the skin, the most effective technique, even if painful, is to remove it abruptly in one go.

Zip, it hurts, but after that you don’t think about it anymore. Gradually removing it, millimeter by millimeter, is a completely useless and ineffective technique. The pain continues and the bandage always sticks to the skin…

The unbridled inflation that we have been witnessing for a year therefore deserves vigorous measures consistent with the evil to be combated. By ordering significant increases of 75 or 100 basis points, the Bank of Canada has committed to getting the inflation curve back on track as soon as possible while hoping the economic slowdown will be gentle.

A borrowing strategy

However, we can see policymakers starting to moderate the magnitude of future hikes, as evidenced by the Bank of Canada’s recent 50-point interest rate hike.

For its part, the Federal Reserve raised interest rates by a further 75 basis points last Wednesday, but Chair Jerome Powell made it clear that the Federal Reserve is very likely to slow the pace and amplitude futures at its next monetary policy committee meeting in December.

So the Band-Aid technique seems to be nearing the end of its process, but interest rates will not start falling. There is still a long way to go before we hope for an initial easing of monetary policy in both Canada and the United States.

If we know that the effect of interest rate increases takes at least 12 to 18 months before they fully affect economic activity, we can clearly see that the situation of relatively high interest rates will persist as long as inflation does not return to the range of 2 to 3% expected by monetary authorities.

However, the rate hikes over the past nine months have hit households who inadvertently took out adjustable-rate mortgages head-on. In my opinion, anyone who has done this in recent years has been badly advised by their financial institution.

Interest rates have been at exceptionally low levels since 2020 due to the context of the pandemic, which has forced central banks to be particularly accommodating.

In my opinion, this was the ideal time to take out a long-term fixed-rate mortgage, as interest rates would not last forever at what were historically some of the lowest rates ever offered.

For many homeowners getting their first mortgage in the late 1980s, the average interest rate was around 11%. Prices weren’t the same, we agree, but the financial burden of paying interest was still much heavier than the “high” rates we know today.