The Bank Of Canada Explained Why It's Raising Interests Rates & How This Combats Inflation
It's to cool an "overheated" economy.
The Bank of Canada in Ottawa.
In case you haven't noticed, the Bank of Canada has been increasing the prime interest rate over the last few months in a bid to help ease inflation.
But, how exactly does that work?
Well, the Bank of Canada (BOC) recently published a thread on Twitter breaking down how its strategy of upping the interest rate can help make inflation go down.
\u201cCurrent levels of #inflation are painfully high.\n\nSome of it is global.\n\ud83d\ude9a Supply chain problems\n\u26fd A huge boost in oil prices\n\ud83c\uddfa\ud83c\udde6 Russia\u2019s invasion of #Ukraine\n\nThese and other issues are affecting prices, making just about everything more expensive for Canadians.\n\n2/6\u201d— Bank of Canada (@Bank of Canada) 1659022358
The BOC mentions that inflation is heating up because of a lot of factors. Not the least of those is the invasion of Ukraine by Russia, rising fuel costs and global supply chain issues.
But another factor is that the economy is "overheating."
"#COVID19 restrictions are lifted + people want to get back to normal = shortages of workers and goods," said the bank. "Prices tend to go up when the demand for goods and services is more than the [economy] can supply."
\u201cBut some inflation is happening because our #economy is overheated.\n\n#COVID19 restrictions are lifted + people want to get back to normal = shortages of workers and goods.\n\n3/6\u201d— Bank of Canada (@Bank of Canada) 1659022358
This is partly why we're currently experiencing the 7.7% inflation rate, last reported for June.
And so, to start cooling off the overheating market, the Bank of Canada has been rising the prime interest rate.
"Raising #InterestRates causes people and businesses to: 1. stop or slow spending, 2. borrow less, so they buy less," continued the monetary organization.
\u201cRaising #InterestRates causes people and businesses to:\n1\ufe0f\u20e3 stop or slow spending,\n2\ufe0f\u20e3 borrow less, so they buy less.\n\nLess demand brings the economy back into balance, putting the brakes on inflation.\n\n5/6\u201d— Bank of Canada (@Bank of Canada) 1659022358
"Less demand brings the economy back into balance, putting the brakes on inflation," it said.
And with this, the Bank of Canada is saying that it "WILL get inflation back to [their] 2% target."
\u201cWe know that inflation is too high.\n\nThis high inflation won\u2019t last.\n\nWe\u2019ve been raising the policy interest rate to slow demand and reduce inflation.\n\nWe WILL get inflation back to our 2% target.\n\nhttps://t.co/Q7bSRL8Nmj\n\n6/6\u201d— Bank of Canada (@Bank of Canada) 1659022358
However, this strategy hasn't eased the financial anxiety felt by some Canadians.
A recent study found that one in four Canadian homeowners might be forced to sell their house if interest rates were to climb any higher.
Additionally, some experts believe continued increases to the prime interest rate to combat inflation will trigger a recession, as it has nearly every other time it's been attempted.
And with at least three more hikes predicted, it seems that at the very least the cost of things like mortgages and other big loans could continue to be high throughout the rest of the year.
This article's cover image was used for illustrative purposes only.
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