BOC Governor Macklem has signalled, for the first time in many years, that the era of easy money is coming to an end. Whereas prior to October 2021 we had every expectation of the core interest rate remaining flat for several more quarters, we now have an expectation for an increase as early as the second quarter 2022. It stands to reason more will follow, and we enter a trend of rising interest rates. Why the shift in policy? In a word, inflation. Inflation has reared its ugly head, and in a meaningful way. Oil, natural gas, food, housing costs and most every product has become more expensive the past two quarters. Target inflation or GDP growth is 2%. Recent reported figures, ex-food and fuel have been above 5% on an annualized basis. Add food and fuel and you these figures are above 6%. These figures are the highest we have seen in 30 years and are clearly untenable. While many economists have predicted this high figure to be transitory (increased money supply (QE and other gov’t support programs of the last two years, supply chain and pandemic sited as main factors), and we are just now starting to see the price of oil dip a bit (down 10% the past week), there is no reason to believe higher prices will not continue into next year. The way a central bank can combat inflation is through increased interest rates. This move effectively removes excess cash from the economy and has a cooling effect on business activity. Global banks had printed massive amounts of money over the past year to combat the dampening effects of Covid-19. This helped keep people employed and in their homes. Now this excess capital will be “sponged up” before pricing gets out of hand. In addition, central banks will like to add another tool to combat future calamities, and with a current rate of 0.25% in Canada, there is not much room for action. We have seen the 10-year bond rate rise from spring 2021, which is also indicative of a rising lending rate. The 10-year bond is a very good gauge of where bank lending rates are heading, as many loans are sold by the banks in packages of 10-year securitized bonds. This hit home in the month of September, where we saw a mini-correction in the stock market (7% or so). This was quickly reversed as we proceeded through earnings releases in October where most companies issued robust earnings and gave guidance for better earnings going forward. This is all good news. The roadblock continues to be the supply chain – ships stuck at ports; an estimated shortfall of 80,000 linehaul truck drives across North America and a general lack of staff across the globe due to ongoing pandemic shutdowns. So long as increases to the interest rate are well forecast and implemented over an extended period of time, the markets will be able to absorb the information and accommodate these moves. What we do not want to see are unexpected or rapidly rising interest rates – this will simply shock the markets and larger corrections may occur. So far, it appears Governor Macklem has adopted the former stance – forecast any changes well in advance and then proceed with caution. With the average dividend yield for the stocks listed on the TSX at 2.4%, there is plenty of room for the Bank Rate to increase before bonds become competitive with stocks. As such, I believe the markets will continue to trend upward on good earnings, but at a rate less rocket-like and more natural.