If you’re a variable mortgage holder, chances are you’re familiar with the Bank of Canada’s 2% inflationary target. After all, this number—which reflects the state of Consumer Price Index inflation in the Canadian economy—is one of the most influential factors in determining whether the Bank chooses to increase, decrease or maintain the target for the overnight rate. Which, in turn, impacts your variable rate mortgage.
But while you may be cursing the Bank’s obsession with that 2% target in recent months (because, right now, our healthy economy is pushing that number upwards), we should all be grateful for it. Because, before Canada targeted inflation, inflation was incredibly volatile—which led to unpredictable economic growth, high unemployment rates and, let’s not forget, mortgage rates as high as 20.5%. In fact, according to the C.D. Howe Institute, inflationary targeting has helped countless countries around the world in a myriad of ways. By introducing economic consistency and predictability, it’s made life easier for businesses, governments and citizens alike.
So why would anyone mess with a good thing by raising the inflation target? Well, apparently there’s been some speculation that the low interest rates we’ve enjoyed over the last decade or so could become the new normal. If this is the case, that’s bad news for central banks, like the Bank of Canada, who have significantly less wiggle room when it comes to setting monetary policy.
While there’s an argument to be made in favour of such a move, according to C.D. Howe, the cons of hiking the year-over-year CPI inflationary target outweigh the pros. That being said, the Institute does recommend alternatives that could provide the Bank of Canada with more flexibility—such as maintaining the 2% goal, but lengthening the time to achieve it. So rather than a year-over-year target, the period used to measure inflation could be expanded to two years.
The C.D. Howe blog goes into this argument—and others—in more detail. I invite you to check it out! In the meantime, if you have any questions about your variable rate mortgage, please don’t hesitate to reach out!