Macklem calls inflation growth transitory but not short-lived, noting the central bank keeps it under control. Is variable rate mortgage still an attractive option?
According to the Bank of Canada Governor Tiff Macklem, the Bank is perfectly capable of reducing inflation back to its target level.
“We’ll keep inflation under control,” – noted Macklem in a Sunday interview. “Our job is to make sure the prices gain we’re facing today globally doesn’t transform into generalized and enduring inflation in Canada.”
Macklem says the BoC has all the necessary tools and it will use it to bring inflation back down to its 2% target level.
Such comments follow the Bank’s recent decision to put an end to its quantitative easing program, while also bringing its timeline for a possible interest rate hike closer, hinting at April.
In addition to it, inflation forecasts were raised to 3.4% for both 2021 and 2022.
Worries about consumer prices growth have often been swept away as “transitory” by Macklem and U.S Federal Reserve Chairman Jerome Powell. However, Macklem admits the word might be slightly wrong.
“Economists see the word transitory as not permanent, while many people think that word means it will be over quickly,” – he explained. “It’s more like transitory, but not short-lived.”
Although he admits that inflation is a problem faced not only by Canada, and that global supply chain issues are the main reason why consumer prices are skyrocketing all over the world, he believes the Canadian consumer plays a role in reducing the inflation.
“There’s a sharp increase in global demand for goods, while the supply remains restrained. There’s still production problems as plants get shutdown because of COVID outbreaks,” – noted Macklem.
“When consumer households start switching more to services than to goods, that will reduce some of the pressure.”
Despite the chain disruptions, Macklem says the BoC still controls inflation.
“We’ll keep adjusting our monetary policy. The main task is ensuring full recovery and returning to the target inflation.”
All of the above could mean Prime rate will start rising sometime next year and variable rate mortgage holders will start paying more, however spread (the difference) between today’s best 5 years fixed and 5 years variable is more than 1%, so it would take more than 5 rate hikes (usually done by 0.25% increment) to only pair today’s fixed with the projected variable rate. Based on the history and economy cycles we still believe that variable mortgage with might be a better way to go for many well qualified borrowers.