Why are Rates Going up?

Why are rates going up so much? 

As prices for goods across the world continue to go up (caused by increased gas and oil shortages, reduced food supply and pandemic supply chain pressures), it creates an expectation that prices will continue to rise rapidly in the future. 

Policy makers at the world’s central banks are worried that these expectations will get “baked in” to the consumers’ mindset, which will incite labour forces to demand to be paid much more to pay for these goods. 

Since demand will not decline it will push the cost of goods up. Which will then again put pressure on the labour market to make more money to pay for these goods. It causes a never ending cycle of price increases and labour costs which devalues the country’s currency. Without a stable currency, the country’s banking system is at risk of collapse.  If that happens, we’re all in trouble.  

As a result, borrowing costs are expected to continue rising as most of the world’s big central banks rush to combat inflation by increasing their policy rate.  In Canada, we call this rate the overnight lending rate or simply the policy rate.  

With the expectation of short-term rate increases, and with it, the very real prospect of a recession, investors are putting their money into safe havens like the US dollar and bonds with guaranteed returns.  In turn, this pushes the price of bonds up as more people want the guaranteed return.  This raises the prices of the fixed mortgage rates (1, 2, 3, 4, 5, 7 and 10-year fixed terms) since the asset classes are related. 

Subsequently, The S&P 500 hit its weakest level since Nov. 30 2020 as investors shy away from stocks in favour of protecting their portfolios with guaranteed returns in the bond market.  Expect this trend to continue.