We need a rate hike to tame 'quiet thief' of inflation, says advisor

Wealth managers discuss interest-rate policy ramifications ahead of Bank of Canada announcement this week

We need a rate hike to tame 'quiet thief' of inflation, says advisor

Given that the Bank of Canada is expected to announce on Wednesday that it will start raising its interest rates, advisors are beginning to weigh in on its potential impact.

“We have to have a rate increase,” David Little, the Senior Wealth Advisor for Blue Oceans Private Wealth in Burlington, Ontario, told Wealth Professional. “I would say we probably need more than one in 2022.

“We used to call inflation the quiet thief. People don’t understand how it impacts their life, but I think the government doesn’t have a choice but to raise interest rates to curtail the inflation rate, which normally wouldn’t be a good thing. It’s a retraction of capital in the marketplace.

“But, hopefully it will drop inflation down to the 4% range and increase people’s spending power because it’s going so much higher than the interest rate. I think it’s imperative that we not let inflation keep running the way it is or it will become more long-term, which then is very detrimental to the country and economy. So, it’s a very welcome start to see a tightening of the monetary policy in Canada, for sure.”

While some have speculated that the bank could have six rate hikes – for a total of 1.75% – this year, Little expects fewer hikes that might only climb to a maximum of 1.5% for the year.

“That would have a fairly major impact on the government’s national debt,” he said. “So, I don’t think they could let the interest rate get to the point that it has a negative impact on the economy.”

Little said the bank will monitor the impact the interest rate climb has on inflation and, if it isn’t much, then it might accelerate it over the course of the year. But he noted that, although the first quarter is expected to be sluggish and we could see 4% growth this year, “they don’t want to jeopardize that, so they have to walk a fine tightrope here".

Francine Dick, a financial advisor with Carte Wealth Management Inc. in Toronto, agreed. She said the bank may start testing the waters with a 25 basis points increase “and, if the world doesn’t collapse, then it might start inching it up a bit” – though she also doesn’t expect six rate increases, or a 1.75% hike, for the year. 

“The whole thing with interest rates is they’ve backed themselves into a corner over the years because they kept lowering them,” she told Wealth Professional. “We’ve never seen mortgage rates this low, so people kept buying houses and housing prices went exponentially high. Now, a lot of people are highly leveraged, so I think they’ve held off increasing rates because people may lose their homes.”

While she noted that a rate increase will improve interest rates for savings accounts and guaranteed investment certificates, she’s concerned about what impact it will have on first-time buyers who still want to own property, people who must renew mortgages or have variable mortgage rates or a variable line of credit, home equity lines of credit, or those with recent student loans.

Dick recommended that those with variable rate mortgages calculate the difference a higher mortgage rate would cost and start paying it now. So, if the rate doesn’t increase, they can pay down more of the principal. “Just be proactive rather than reactive,” she said. 

In the meantime, she recommended that advisors review the bonds in their clients’ portfolios as the interest rates increase, since that will cause bond rates to drop.

Little said he’s looking at rotating assets into different industries, and has pulled back from the U.S. a bit, but is looking more globally and is particularly interested in China.