Last week Canadian consumer price index made a lot of headlines, by reaching 2.3% in May 2014. For the first time in two years that inflation went about 2% mark. As a result all the investors thought that this is a clear indication of future rate hike. Economists, including Bank of Canada, were not expecting such a hike in this period of time.
Bank of Canada who decides the overnight lending rate – monitors two types of inflations. One is Consumer Price Index and another is core inflation rate. The inflation rate target for the bank is in between 1% to 3%. The current inflation – although the jump is sharp – remained under 3% by reaching 2.3% mark.
Core inflation, for which bank of Canada has no direct target set – has reached to 1.7%. The Canadian central bank clearly was not expecting a jump at this time but this should not be a reason for concern.
In past, such jumps were not always followed by an immediate raise in overnight target rate. There are many factors BoC considers when it decides the future of overnight target rate.
This hike is actually a forewarning of uncertainties in the financial market. Many mortgage shoppers tend to assume that the interest rates will stay flat-line for a very long time. But this outlook can change – if the inflation rate keeps climbing up – in a very short period of time.
While making a decision on mortgage it is not a good idea to be driven by fear of unknown or greed of lower rates. The decisions should be made based on future requirement, financial capabilities and a proper risk analysis.
The homeowner who are shopping for a mortgage should not make a variable rate decision when worried about where the rates will go in future. Analyze your situation based on worst-case scenario and then make an educated judgment