Unveiling The Historical Norm: Preparing For A Return To Higher Interest Rates In Canada
Canada experienced an unprecedented period of historically low interest rates from 2009 to 2020. However, as we move into an era of rate hikes after rate hikes, it is important to recognize that this low interest rate environment was actually an outlier and to prepare for the future. This analysis aims to shed light on the historical norm of interest rates in Canada, emphasizing the need for individuals to prepare for a return to an interest rate environment more in line with historical standards.
The Era of Low Interest Rates: An Exceptional Period
The low interest rate environment witnessed from 2009 to 2020 was actually an extraordinary response to the global financial crisis and subsequent economic challenges. Central banks worldwide, including the Bank of Canada, implemented aggressive monetary policies to stimulate economic growth. As a result, interest rates were kept at historically low levels to encourage borrowing and investment. The graph above the article shows what an outlier this period has been. The line represents short and longer term interest rates. LIBOR is the London Interbank Overnight Rate: it used to be the most relevant marker for worldwide interest rate movements before it came out that it was manipulated in 2012. The gray zones represent the recent recessions. Regardless of the scandal surrounding LIBOR, the graphic is telling and relevant. Any other interest rate graphic would show the same trend.
The Historical Norm: Rising And Cyclical Interest Rates
Looking back at Canada’s economic history, it becomes evident that the era of low interest rates was an anomaly. Historically, interest rates have exhibited a cyclical pattern, with periods of both low and high rates. Higher interest rates were the norm in past decades, serving as a tool to manage inflation and promote stable economic conditions.
The Impact Of Economic Factors On Interest Rates
Interest rates are influenced by various economic factors, including inflation, employment rates, economic growth, and monetary policy decisions. During periods of economic expansion and inflationary pressures, central banks tend to raise interest rates to curb inflation and maintain price stability. Conversely, in times of economic slowdown, central banks may lower rates to stimulate borrowing and investment.
Preparing For A Return To Normalcy
As we navigate the aftermath of the global financial crisis and recent economic challenges, it is prudent for individuals to prepare for a return to an interest rate environment more aligned with historical standards. The following steps can help individuals mitigate the impact of rising interest rates:
Assessing Debt Servicing Capacity
Understand the impact of higher interest rates on your current debt obligations. Calculate the potential increase in monthly payments and ensure your budget can accommodate the change.
Building A Financial Buffer
Establish an emergency fund to protect against unexpected expenses or income fluctuations. A financial buffer can help absorb the impact of rising interest rates and provide a safety net during challenging times.
For individuals with variable-rate mortgages or high-interest debts, evaluating refinancing options before interest rates rise further may be beneficial. Locking in a fixed-rate mortgage or consolidating high-interest debts into a more manageable loan can provide stability and potentially save on interest costs.
Long-Term Financial Planning
Incorporate higher interest rates into your long-term financial planning. Consider the impact on savings, investments, retirement plans, and other financial goals. Adjust your strategies to account for potential reduced investment returns and higher borrowing costs.
Seeking Professional Advice
Consult with financial advisors or mortgage professionals to assess your individual circumstances and develop a personalized plan to navigate the changing interest rate environment effectively.
The era of low interest rates in Canada from 2009 to 2020 was an exceptional period driven by unique economic circumstances. As we move forward, it is crucial to recognize that historically, higher interest rates have been the norm. By understanding the cyclical nature of interest rates, assessing debt obligations, building a financial buffer, considering refinancing options, and incorporating higher rates into long-term financial planning, individuals can prepare themselves for a return to an interest rate environment more aligned with historical standards. Being proactive and well-informed will empower individuals to navigate the changing landscape and secure their financial future.