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Email this8:09 am
December 22, 2022
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More rate hikes coming. Bad for borrowers but great for savers.
8:44 am
October 27, 2013
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My guess is BoC may stay on the sidelines for a bit here. The main contributors to higher inflation in July were higher energy prices, effects of mortgage rate increases and food inflation.
More BoC increases will not fix any of those, other than to potentially strengthen the loonie towards 78 cents instead of 74 cents to increase its purchasing power on globally priced goods and services (such as gasoline and food).
Added: My Goldilock's scenario would be a BoC hold on further rate increases, or no more than another 25bp, and to hold for about 2 years until almost everyone's debt resets to the more appropriate higher rates. Debt servicing needs to cost materially more than inflation to be effective.
9:25 am
April 27, 2017
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In the long term inflation is good for borrowers and bad for savers. It erodes the value of debt and savings.
Rising overnight interest rates by themselves don’t mean much either way. A firm action by the BoC may actually reduce long term borrowing rates and help people with mortgages. For savers, it all depends on the real interest rate for their product and on the tax rate they pay on interest. In most cases they gain next to nothing.
I have no idea about the future of interest rates. There are signs that employment data are cooling and that money supply is tighter than it has been. The problem is that BoC misjudged the risk of inflation quite badly. To restore the trust it has to be hawkish.
3:05 pm
January 28, 2015
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mordko said
In the long term inflation is good for borrowers and bad for savers. It erodes the value of debt and savings.Rising overnight interest rates by themselves don’t mean much either way. A firm action by the BoC may actually reduce long term borrowing rates and help people with mortgages. For savers, it all depends on the real interest rate for their product and on the tax rate they pay on interest. In most cases they gain next to nothing.
I have no idea about the future of interest rates. There are signs that employment data are cooling and that money supply is tighter than it has been. The problem is that BoC misjudged the risk of inflation quite badly. To restore the trust it has to be hawkish.
In my case sending interest earned directly into rrsp tax is deferred and then it grows again deferring tax so there is a gain, not next to nothing as you imply
3:15 pm
April 27, 2017
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mechone said
In my case sending interest earned directly into rrsp tax is deferred and then it grows again deferring tax so there is a gain, not next to nothing as you imply
Your salary gave you RRSP room. Would you not be contributing to your RRSP without this interest?
In any case, even if we ignore taxes, real interest rate is just 2% - assuming you get 5.3% interest on your cash, which is optimistic.
3:18 pm
January 12, 2019
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.
The next BoC Interest Rate announcement is scheduled for Sept. 6th.
A lot can happen in three weeks time.
Prepare to 'Buckle Up'. 
- Dean
" Live Long, Healthy ... And Prosper! "
4:46 pm
November 8, 2018
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mordko said
In the long term inflation is good for borrowers and bad for savers. It erodes the value of debt and savings.
In my case, as a saver living off mostly interest income, 2021 was the year I ended with negative cash flow. 2022 was break even. In 2023, thanks to 5% interest rates on Savings and short term GICs, I'll be adding thousands of dollars to my savings, even with current levels of inflation. It is only August, but I am already in the black.
Yes, I know, inflation devalues money savings, but does it matter if one ends with more money than they started with, not changing their spending habits?
When BoC starts dropping rates again, don't expect prices to drop to pre-COVID levels. They'll stabilize, but that's it. Meaning, I'll most likely be in the red again if/when bank Savings interest rates and 1yr GICs drop below 3%.
5:13 pm
December 22, 2022
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Alexandre said
mordko said
In the long term inflation is good for borrowers and bad for savers. It erodes the value of debt and savings.When BoC starts dropping rates again, don't expect prices to drop to pre-COVID levels. They'll stabilize, but that's it. Meaning, I'll most likely be in the red again if/when bank Savings interest rates and 1yr GICs drop below 3%.
This is when you should move to stocks. A safe S&P 500 index fund. Once rates go down the market will move up.
5:30 pm
November 3, 2022
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The Rock said
This is when you should move to stocks. A safe S&P 500 index fund. Once rates go down the market will move up.
Don't you mean now is the time to move into stocks? Buying before BoC rates go down makes it more likely to gain when the stock market moves up. If one waits until interest rates start coming down, one will be buying into a rising stock market, and miss the dip.
8:36 am
November 8, 2018
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The Rock said
This is when you should move to stocks. A safe S&P 500 index fund. Once rates go down the market will move up.
Nope, no stocks for me. Not my cup of tea. When my annual expenses start exceeding my income from interest and other sources, this is when I am going to apply for CPP+OAS.
10:07 am
January 28, 2015
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mordko said
Your salary gave you RRSP room. Would you not be contributing to your RRSP without this interest?
In any case, even if we ignore taxes, real interest rate is just 2% - assuming you get 5.3% interest on your cash, which is optimistic.
Optimistic ?? well Iam getting that and earn 30k in interest outside of RRSP and that is the room every year in my rrsp every year...so the intertest earned is financing my RRSP. So explain how the real interest rate is 2%. I have maxed out RRSP since I was 20 and i'm now 60.... I will live on the interest alone in savings and rrsp before 71 turning it into a Rrif. I'm retiring at 62
10:22 am
October 27, 2013
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If one is getting 5.3% in interest yield and inflation is 3.3%, then the real return (yield) is the difference.... 2%. I believe that is where Mordko is coming from.
I don't have historical charts at hand but it seems to me that over the past 20 years or so, 'real return' before tax has not been more than ~2% and that is only if one has made the effort to search for yield, e.g. institution hopping (HISA and GIC), and investment grade corporate bonds. Junk bonds have more spread but they are not investment grade and should not be included in the same bucket.
Added: So while one gets more nominal dollars when interest rates and inflation is higher, the loss in purchasing power erodes perceived value.
12:16 pm
April 27, 2017
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mechone said
Optimistic ?? well Iam getting that and earn 30k in interest outside of RRSP and that is the room every year in my rrsp every year...so the intertest earned is financing my RRSP. So explain how the real interest rate is 2%. I have maxed out RRSP since I was 20 and i'm now 60.... I will live on the interest alone in savings and rrsp before 71 turning it into a Rrif. I'm retiring at 62
You really should account for tax on your HISA. Clearly your RRSP has been funded from your salary so thats where the RRSP tax deduction should count.
So net of inflation and tax you are earning zero on your HISA outside of RRSP. 30K is probably taxed at 50%, so you are left with 15k. That does not quite cover losses due to inflation on your ~600k in fixed income.
Its good that the real interest on HISA (net of inflation but before taxes) is above zero. Wasn’t the case a year ago. And there is a good chance it will turn negative again if the economy falters.
2:12 pm
March 30, 2017
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The Rock said
More rate hikes coming. Bad for borrowers but great for savers.
Inflation is bad for both borrowers and savers. More immediate impact to borrowers when rate goes up, savers also suffer in the long run if inflation is not tame.
Even for savers that has the interest earned in a tax shielded account for now, it will become taxable at some point. If your net tax payable ends up being low when it is time to draw down your RRSP, I dont envy you either 🙂
One should be happy when one gets claw back 100% on OAS 100% :))
4:43 am
January 28, 2015
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mordko said
You really should account for tax on your HISA. Clearly your RRSP has been funded from your salary so thats where the RRSP tax deduction should count.
So net of inflation and tax you are earning zero on your HISA outside of RRSP. 30K is probably taxed at 50%, so you are left with 15k. That does not quite cover losses due to inflation on your ~600k in fixed income.
Its good that the real interest on HISA (net of inflation but before taxes) is above zero. Wasn’t the case a year ago. And there is a good chance it will turn negative again if the economy falters.
Over 100k of the 600k is TFSA ..so no tax and I don't pay any on the 500k interest as it funds my RRSP. At tax time I don't pay and I bank my cheque and grow more savings , no mortgage or debt, just house costs to carry 800 a month and yacht club fee's . and I donate to many charties I pay no natural gas as it is funded by over 30k in enbridge stock and same for hydro, inflation has not really affected me other than my house shooting up over a million
5:15 am
April 27, 2017
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Reads like mental gymnastics.
Usually people have expenses related to food, fitness, transportation, entertainment, healthcare, etc which would be mentioned as well as “yacht club”. And you do have utility costs. The fact you have investments does not mean “zero utility costs”.
I understand you are trying to persuade yourself that inflation has no impact on you but self-deception shouldn’t be necessary if you are so well off.
It is true that $100K cash in TFSA isn’t subject to taxes and may be growing by 2% a year in real terms. That’s a really poor use of TFSA room in my book. The name “savings account” is a bit unfortunate, results in people ending up with less TFSA assets. Your 2% tax-free return is costing you a lot of tax which you will be paying on growth assets instead.
6:13 am
March 30, 2017
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mordko said
Usually people have expenses related to food, fitness, transportation, entertainment, healthcare, etc which would be mentioned as well as “yacht club”. And you do have utility costs. The fact you have investments does not mean “zero utility costs”.
maybe his grocery bill is funded by loblaws, tranporation by oil and gas, etc etc 🙂
Interesting wrong to think one is not affected by inflation. But if that makes one happy, why not !
In my case, my house's value going through the roof has zero impact to me. Its part of my legacy for my kid, I wont benefit from it. I dont count it as my asset either, its not income generating, instead a huge cash drain !!
9:09 am
October 27, 2013
Online
The argument is not worth it. What Mechone has done is create a real time self-funding 'cash flow' model which is laudable and cool. However, that is a subject for a different thread though than this one on inflation and effects thereof on an asset base.
9:42 am
April 27, 2017
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Its only “self funding” if Enbridge stock total return keeps up with gas prices which is a risky assumption.
This self-deception is also leading to misguided decision making like filling TFSA with cash.
In general, thinking that inflation is good for your pocket is very misguided.
10:33 am
October 27, 2013
Online
Some may not care about the erosion of asset values on a real basis over time and that it will eventually erode the current value of a cash flow model (and thus Enbridge dividends). If one only has a 10-15 year investment horizon, one might care even less.
I cared very much when I retired at 57 years of age, almost 20 years ago and focused on equities. I don't care nearly as much now as compounding risks associated with inflation are largely behind me (and I suspect for many members of this site). It is a matter of context and where one is at in life's journey.
Please write your comments in the forum.