Sailboat on the ocean

Inflation to date

If you’re having a tough time making some decisions during the pandemic, you can at least be thankful that you’re not in Bank of Canada Governor Tiff Macklem’s shoes. He has the unenviable position of trying to balance the need for continued economic stimulus while keeping inflation in check.

Inflation has clearly picked up, with prices in March rising 2.2% from a year ago. Prices accelerated twice as fast in March as they did the month before (inflation gained 1.1% year over year in February). The latest figure is also above the central bank’s 2% inflation goal.

So yes, inflation is officially creeping higher.

That’s in keeping with a Canadian economy that’s suddenly hot, with GDP surging 6.5% in the first quarter of 2021, compared to the same period a year ago, according to a preliminary estimate from Statistics Canada.

The Bank of Canada: stuck between inflation and a rising loonie

In response, the Bank of Canada moved up its forecast for a hike in its benchmark overnight lending rate (or the rate at which financial institutions lend to one another) to the second half of 2022 from its previous projection of 2023 at the earliest.

It has also cut the amount it is spending on government bond repurchases, its method of expanding the money supply in the economy, from $4 billion per quarter to $3 billion.

That seems like a logical response, but there are pitfalls to cutting back on stimulus too early. For one, COVID-19 restrictions have been tightening, so the latest growth numbers may not hold—partially indicated by the loss of 207,000 jobs in April.

Then there’s the U.S. Federal Reserve, which is taking a more relaxed view of inflation, with no plans to hike interest rates until 2024.

The widening daylight between the two central banks has lifted the Canadian dollar, driving its value from around 79 cents U.S. on April 20 to 83 cents as of this writing (May 20). While a headwind for Canadian exports, the potential for higher interest rates (and with them mortgage rates) has left some homeowners—and aspiring homeowners—feeling nervous.

Add it all up and we’re left with a delicate dance for Macklem and the bank he leads: remove stimulus too fast and risk harming exports and the housing market. Go too slow and risk fueling rising inflation.

Either way, we should prepare for higher rates and a continued jump in prices in the coming months.

There are two key areas to consider when looking to hedge against inflation.

1. Your portfolio: stick with stocks

When the economy records a period of rising growth and rising inflation—a likely scenario in the coming months—stocks* tend to perform well. Recent analysis by Manulife shows that the TSX returned 12.8% annualized in such periods, commodities returned 7.2% annualized, and gold gained 11.8%. Both commodities in general and gold in particular have long been seen as inflation hedges.

One example we could look to for a historical comparison is the last sustained string of Bank of Canada interest rate hikes. From September 8, 2004 to July 10, 2007, the central bank lifted its overnight lending rate from 2% to 4.25%. The TSX gained 69% in that time span. Gold also gained sharply, rising from around $565 an ounce to $846.

Beyond shares in resource companies, you can increase your exposure to the sector through exchange-traded funds that track the price of the commodity you’re interested in, which is much more convenient than owning the commodity (gold or silver bars, for example) itself.

2. Your mortgage: fix that rate

Home shopping? Get a mortgage pre-approval now. If you’re planning to shop for a property this spring, now is a good time to speak with your advisor and get pre-approved. You’ll lock in today’s rates for 90 days, protecting you from any near-term rate increases.

And there is some potentially positive news for buyers in the months ahead, as rising rates—or even just the expectation of rising rates—could mean a cooler market. While prices may not dip a significant extent, we could see a shift away from the frenzied, bidding-war-driven market we saw during the pandemic.

We’ve already seen the Vancouver market settle somewhat: according to the Real Estate Board of Greater Vancouver (REBGV), the number of home sales fell 39% between April 2020 and April 2019. While prices did rise, they were up just 2.5% from 2019 (going back two years to avoid the pandemic-depressed April 2020 comparable). The number of new listings also declined.

Something else that could help calm the market is that, as of June 1, the Office of the Superintendent of Financial Institutions, which regulates banking in Canada, intends to increase the qualifications for the so-called “stress test” on buyers using uninsured mortgages (or those who have a down payment of less than 20%).

In those cases, buyers will have to demonstrate that they can handle payments at a rate of 2% above their approved mortgage rate or a total rate of 5.25%, whichever is higher. That’s up from a floor of 4.79% previously. The regulator says it’s making this move to prepare home purchasers for rates more in line with pre-pandemic norms.

Already have a mortgage and it’s a variable rate? Move to a fixed rate. At today’s rates, it would only take a couple of moves in the prime rate for a variable rate mortgage to surpass a fixed rate one, and rates are starting to move up as institutions anticipate a rise in the prime rate.

So if you haven’t already done so, now is a good time to lock in all or part of your mortgage, based on current interest-rate trends.

Your advisor can help you navigate the fast-changing economic landscape

With higher consumer prices and interest rates both possible later this year, it’s a good time to speak with your advisor, who can help you make sure your investments—from your home to your retirement savings—are as protected as possible.

BlueShore Financial, Financial Advisor, Maureen Jones

Maureen Jones

Financial Advisor

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*Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. Credential Securities is a registered mark owned by Aviso Wealth Inc. Credential Asset Management Inc., Credential Qtrade Securities Inc. and Northwest & Ethical Investments L.P. are wholly owned subsidiaries of Aviso Wealth Inc.

Credential®, Credential Securities®, Qtrade Investor® are registered marks owned by Aviso Wealth Inc.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated.

The information contained in this article/video was written by BlueShore Financial or one of our expert financial writers and was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. It is provided as a general source of information and should not be considered personal financial advice.