Listen to the Governor of the Bank of Canada

Those who heeded the Governor of the Bank of Canada in late 2021 or early in 2022 about increasing interest rates and renewed or renegotiated their mortgages for a five-year term at that time would have saved themselves a lot of money. Sacrificing a small penalty in renegotiation turned out to be a wise investment as they have a mortgage rate of about two per cent until 2026, at which time interest rates would likely be lower, but not back to two per cent.

The Governor of the Bank of Canada made it well known for several months at the end of 2021 that interest rates would rise. It was not a surprise.

The Governor of the Bank of Canada made it well known since January 2024 that interest rates would decrease this year, maybe not this month, but maybe June or later.

Now is the time to consider buying GIC investments (Guaranteed Investment Certificates) while interest rates are high or consider taking out an annuity as annuity payments depend on interest rates.

New investments in GICS and annuities take money out of circulation immediately, so supporting the Governor of the Bank of Canada in his job of reducing inflation, thus helping to reduce interest rates.

The federal government seems to be at cross purposes with the Governor of the Bank of Canada, as the former is increasing inflation by spending more than it takes in, in revenue. This scenario will only delay the reduction in interest rates, which is why interest rates were not reduced in March. There is a well-known saying “you cannot have your cake and eat it too.”

Recent economic reports indicate that inflation is very gradually being reduced. The recent Canadian consumer price index (CPI) has fallen from 2.9 per cent to 2.8 per cent, not a lot but in the right direction. The cost of energy is increasing. Crude oil (WTI) is now over US$80 per barrel (at the time of writing), which is welcomed by oil companies, which can help pay off their debts. This will take money out of circulation, helping reduce inflation.

The main uncertainty is the level of new debt coming from all levels of government, mainly federal and provincial. If new debt increases substantially, the Bank of Canada rate will remain as is for an extended period of time and the current level may be the new norm.

The latter scenario may turn out to be good for the national economy.

Firstly, it will encourage people to save more.

Secondly, the extra savings will be available to borrowers at a reasonable cost. Capital projects, in particular, will undergo more scrutiny and some may be cancelled.

Thirdly, those about to retire can convert their RRSP into a favourable annuity.

Fourthly, those saving for retirement can get more value out of their savings. Consider a CPI rate of, say, thre eper cent versus a GIC rate of five per cent or a dividend rate of four per cent or higher. Under these conditions or similar, savers can keep ahead of inflation.

All four of the items above will tend to reduce the money supply and keep inflation in check. The economic mood today is to control inflation and maintain price stability. Before making an investment decision, consult with your financial advisor.

Ian Mcmaster St. John’s