Essential Knowledge Series
You've probably heard about the Bank of Canada (BoC) raising interest rates by 0.50% on Wednesday. Although Canadians were expecting an increase, it doesn't seem to hurt any less.
But that's when I decided to look past the interest rates and see what this means for the average Canadian. On the surface, an interest rate increase seems like it will hurt Canadians, and that's true. But are there any positives we can take away from the BoC increasing rates, now and in the future?
Let's start with the most obvious question, why is the BoC raising rates. According to the BoC, "The economy can handle higher interest rates, and they are needed" referencing the high inflation Canada is experiencing.
Knowing this, it's not out of line to say that if inflation continues in the upward direction we've seen over the past 12 months, more rate increases will follow.
That's when the anxiety for most Canadians starts to set in. Increase after increase and soon enough your line of credit/mortgage/loan payments start to cost you more. How can the average Canadian handle it?
To answer this question, and the reason why I stopped worrying about interest rate hikes, let's dive into the macroeconomics of it all. Generally speaking, when interest rates go up, consumer goods prices go down and when interest rates go down, consumer prices go up.
As money becomes easier to borrow at lower rates, Canadians are willing to take on more debt. More debt leads to more spending and more spending leads to price increases.
Likewise, when interest rates go up, money becomes more difficult to borrow. As a result, Canadians have less money to spend and prices either stay stagnant or decrease.
The last statement is the precise reason I've stopped worrying about interest rates as much as I have in the past. My focus and the focus of all Canadians at this point in time should be the skyrocketing inflation. With inflation this high, the interest rate will be the least of our worries because eventually, no one will be able to afford anything substantial such as a new home, car, etc.
I like to remind Canadians of the following, "Inflation is taxation without legislation". In most Western countries, people are already being taxed tremendously and if we can avoid that by raising interest rates, I'd say we give that a chance. Remember, even though interest rates are increasing doesn't mean they can't be reduced again in the future. As they say, what goes up must come down.
Let's just hope that saying holds true for inflation also.
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Very well written , I couldn’t agree more with this!