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Borrowers relieved as interest rates stays at 5%
The Bank of Canada (BoC) announced on Wednesday that it would hold interest rates at 5%, at least until the next decision date, October 25.
Given the surprising news of negative gross domestic product (GDP) numbers and slightly higher unemployment rates last month, the decision not to raise rates had been widely forecast.
The BoC recognized these realities by saying, “The Canadian economy has entered a period of weaker growth.”
Interestingly though, the Canadian central bank was still cautious with its overall messaging, communicating to investors that they were, “prepared to increase the policy interest rate further if needed.” Of course, one would imagine that a central bank is always ready to increase the interest rate “if needed”—as that’s essentially the job description.
Somewhat concerning, though, several Canadian politicians have taken to criticizing the BoC’s recent inflation-fighting efforts, including Finance Minister Chrystia Freeland, Ontario Premier Doug Ford and British Columbia Premier David Eby. Economists are nearly universal in their support of independent central banks. To see politicians of all stripes join Conservative Party Leader Pierre Poilievre in trash talking the BoC is really a sad state of affairs. No doubt, it will contribute to the misinformation that’s prevalent for mandating central banks.
Yesterday, I wrote to the Governor of the Bank of Canada echoing Premier @Dave_Eby’s call to stop raising interest rates. Ontario families and businesses are struggling to make ends meet and cannot afford the crushing costs brought about by repeated interest rate hikes. pic.twitter.com/cdVE9IQzmH
— Doug Ford (@fordnation) September 4, 2023
While we can understand the plays of politicians trying to get reelected, we wish they would help educate Canadians in the difficult trade-offs that come with interest-rate decisions. Runaway inflation is a major threat to the Canadian standard of living. (Just ask the Turks or Argentianians!) While the fix for high inflation is not even close to being worse than the disease, that doesn’t mean containing it is fun nor easy. When the central bank announces things like “We need to dampen demand,” or “flatten the demand curve,” it is essentially saying, “We’re going to raise interest rates until people feel pain and quit spending money.” That medicine tastes awful—but it’s tough and it works. Politicians should give the space needed to make sure this medicine goes down—not try to score cheap political points.
The interest rate hold was widely expected, and consequently, the Canadian dollar was essentially unchanged on the news.
While interest rate cuts can’t come soon enough for those suffering from variable rate increases or who see their mortgage terms maturing in the near future, the BoC didn’t see any light at the end of the tunnel—or at least it didn’t tell Canadians what it saw. Instead, the central bank appears to be very careful about managing expectations.
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