Bank of Canada’s Aggressive Interest Rate Hikes Stretching Canadians Thin, Challenging Home Affordability

The Bank of Canada is widely predicted to raise interest rates once more, leading to significant concerns about the impact on Canadian households’ financial health. Armine Yalnizyan, senior economist for the Canadian Centre for Policy Alternative, describes this as the “new orthodoxy.”

Central banks use rate hikes to curtail inflation and cool down the economy, a tactic Yalnizyan refers to as a “time-honoured tradition.” However, many question the effectiveness of this strategy as aggressive rate hikes have failed to slow economic growth, contrary to predictions.

For many Canadians, the relentless series of rate hikes and an increasing cost of living are causing financial strain. More than half of Canadians are reportedly $200 away from not being able to pay their bills, painting a grim picture of the repercussions of the rate hikes.

Ahead of the Bank of Canada’s decision, a report from BofA Securities suggested the central bank would hold its policy rate, a prediction that now appears incorrect. Most economists tracked by Bloomberg expect the Bank of Canada to bring its policy rate to five per cent at its July decision.

The Bank of Canada aims to wrestle inflation to its two per cent target by raising its key overnight interest rate. The principle behind this tactic is that making borrowing more expensive will reduce consumer and business spending, driving prices down and slowing the economy.

In the housing market, higher interest rates could exacerbate inflation by increasing borrowing costs for homeowners with mortgages. Since March 2022, rate hikes have added an extra $22,500 per year in interest costs on a variable rate mortgage of $500,000.

Challenging the Inflation Narratives

Several narratives about inflation have circulated, including the belief that too much government spending and increasing unemployment rates cause inflation. However, these claims do not appear to align with the recent inflation trends in Canada.

While the carbon tax has also been targeted as a source of inflation, this seems to be a misunderstanding. In fact, pump prices surged significantly in 2022, which contributed substantially to inflation during that period.

The Bottom Line on Interest Rates

Interest rate hikes are viewed as a blunt tool in the fight against inflation. The impact on workers through higher unemployment and lower wages raises serious questions about the efficacy and fairness of this approach.

Alternative policies should be considered to challenge corporate profiteering and support households struggling to make ends meet. Public investments addressing the intersection between climate action and affordability could be crucial in shaping a more sustainable and equitable future for Canadians.

With another Bank of Canada rate decision due today, all eyes are on whether the central bank will continue its trend of rate hikes in a bid to control inflation, or if it will choose a different approach to protect the financial stability of Canadians.

As Canadians grapple with the financial pressures of the escalating cost of living, the Bank of Canada’s decision will play a significant role in shaping the economic landscape. The pressing question remains, however: At what cost will these efforts to control inflation come to the average Canadian homeowner?

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