The Bank of Canada (“BoC”) has been aggressively increasing interest rates, with another anticipated rate hike on the way. When the pandemic first hit, the BoC responded by lowering the interest rates to stimulate economic activity. By lowering the interest rates, businesses and consumers benefited by having lower payments on their loans. The BoC prioritized making credit more readily available to consumers and businesses. This helped tremendously as businesses suffered from closures and other financial issues. This has changed dramatically since the beginning of 2022—the current policy interest rate sits at 3.25% as of 25 September 2022. This is a huge difference from 0.25% when the year just started, and it has been the fifth consecutive hike, causing concern that there will be more. The next rate announcement will be on 26 October 2022.
As Canada’s central bank, the BoC has the role of promoting the economic and financial welfare of Canada, which includes overseeing areas of monetary policy, financial system, currency, funds management, and retail payments supervision. Their ability to raise interest rates makes borrowing money more expensive, which in turn curbs spending in order to deal with inflation. Their policy is that they aim to keep inflation at the 2% midpoint of an inflation control target range per year. What the BoC did during the pandemic was the opposite—they dropped the rates to stimulate the economy and get individuals to spend more freely. The problem is the rise in interest rates has been hitting Canadians harder than ever. With the rise of food prices, amongst other things, some Canadians are fearful as to what is to come. However, the BoC says that we must raise interest rates to bring inflation down. They state that “given the outlook for inflation, we continue to judge that the policy interest rate will need to rise further.”
On 6 October 2022, Tiff Macklem, the governor of the Bank of Canada, stated that “[w]e do think further interest rate increases are warranted to get inflation all the way back down to target.” Yet, he leaves it unclear as to how much of a raise is actually expected. In his speech delivered at the Halifax Chamber of Commerce, he said that inflation in Canada peaked at 8.1% in June, and while inflation has declined for the past two months, this is insufficient. We need to further flow spending to bring inflation down to a 2% target.
Many people, organizations, and unions are unhappy about this. Bea Bruske, the President of the Canadian Labour Congress, stated:
We raised concerns about the Bank’s rapid monetary tightening pushing our economy into a recession, with potentially devastating impacts on everyday people. A recession would mean thousands of Canadians thrown out of work and downward pressure on wages that are already lagging well behind inflation. Mortgage and loan defaults could skyrocket. We would see substantial damage to people’s quality of life and risk long-lasting economic harm for workers and their families.
There are other individuals who agree with this. The increase in the prices of services and goods has affected Canadians profoundly, and it is hard for some to get by. It is argued that the BoC did not anticipate the rate of inflation, and that they are making up for this by aggressively raising its policy rate. Meanwhile, it is average Canadians who suffer the consequences. According to MNP Consumer Debt Index, 52% of Canadians say that it is less affordable to feed their families. It goes without saying that the credibility of the BoC is being questioned.
This affects many people in many ways. For those who have a variable rate loan, their payments will be subject to higher interest rates. Big banks have raised their interest rate to align with BoC’s interest rate. The Royal Bank of Canada, for example, sent a letter out to some mortgage holders stating that they may be reaching their Triggering Interest Rate, which is when their regular payments are not enough to cover the interest portion of their mortgage.
The interest rate hikes have and will continue to affect students who have a line of credit with variable interest rates. If your interest rate is at prime, then they can increase as Scotiabank’s Prime Rates increase. The Canadian dollar prime lending rate jumped to 5.45% as of 8 September 2022, up from 4.70%.
Canadian Prime Minister Justin Trudeau stated that he would dedicate $4.5 billion to provide relief from inflation to low-income families, which includes a housing benefit for renters. Criticisms of this plan from the Conservative party argue that spending more money will not solve the problem. As Pierre Poilevre, the leader of the Conservative Party of Canada says, “[t]he problem with spending more money as a solution to inflation is that it simply pours more gasoline on the inflationary fire. And that is what Justin Trudeau continues to do.” While the debate as to what the solution is to cope with the rising costs of living and ever-increasing inflation, it is probable that BoC will continue to raise interest rate until they meet their commitment of achieving the 2% inflation.
