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Interest Rate Report Q4 2021: Inflation Isn't Coming, It's Already Here

1/26/2022
The final quarter of 2021 was a hodgepodge for the economy. Canada achieved high rates of vaccination and began a booster campaign, schools remained open for the fall semester, and return-to-office momentum picked up.

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COVID-19 progress encountered a setback with a new strain that proved far more infectious. As a result, much of the population of Canada returned to lockdown by the end of Q4. 

During this period, inflation became a hot topic in virtually every area of the economy, from food and housing to used cars and energy. The cause of inflation is not clear and is probably multifaceted. Some blame loose monetary policy; others on a supply chain stretched to the limit; still others on a disrupted labour market and the "Great Resignation." Transportation suffered a perfect storm of problems in late 2021, from natural disasters in British Columbia to shortages of shipping containers. The markets have responded with higher rates, which will likely soon affect mortgage rates and commercial borrowing. 

Looking at the yield curve, we can see significant changes over the course of a quarter. Short term yields have risen dramatically, with two-year bonds more than doubling from 0.51% to 1.04%. Looking back a year, we can see 2-year rates are now 5x their levels in early 2021, and 5 year bonds are 3.5x as high. Inflation is clearly impacting the expectations of investors, with the market "pricing in" rate increases from the Bank of Canada, after record-low rates through the pandemic. 

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Five-year bond rates have been at a pandemic high over the past quarter. Sub-one percent yields were standard throughout the pandemic period, including unprecedented lows of 0.3% in 2020. However current yields now align more with the pre- COVID period of late 2019. While rates are still low from a historical perspective, the economic situation of Canada is much different than in 2019. Pre-COVID, many markets were near historical lows in terms of office vacancy with record building planned; now many urban centre areas are largely empty and waiting out the latest government restrictions. 2022 will involve grappling with pandemic-fueled changes such as migration out of cities, interrupted education for children, and a disproportionate impact on certain industries such as food and hospitality. 

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Data sourced from Bank of Canada. ©2022 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources believed to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy. 

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