The Bank of Canada has raised interest rates again to keep inflation close to its 2% target. To achieve this goal, the central bank makes changes to its monetary policy.
This scenario has played out countless times around the world. Many people, especially mortgage holders and debt bearers, have always found the concept of rate hikes confusing.
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A hot economy can be problematic, according to central bankers. That’s what they say in her own words:
However, if the economy grows too fast, it could lead to rising inflation. So we could raise interest rates, which means people and businesses pay higher interest rates on loans and mortgages.
A booming economy is… bad?
Accelerating the economy too quickly is viewed negatively by central banks as it can lead to elevated levels of inflation. To combat inflation, the central bank raises interest rates, forcing people and businesses to pay higher interest rates on their loans and mortgages.
When the economy is booming, businesses are expanding, and more people are earning higher incomes, the central bank needs to take action to penalize these types of activities. I’m sorry that middle-class families just struggling to make ends meet are now having to pay more for their debt – apparently for the greater good.
A homeowner who was lucky enough to get a five-year, 0.9% adjustable-rate mortgage on a home worth about $700,000 is now paying $1,317 more per month (Those). Think of this as their role in slowing down a booming economy… which likely helped them afford a home in the first place.
WTF: People save more when interest rates are higher
Die Bank of Canada notesthat people “save more and spend less” with higher interest rates. But it’s odd that this comes from the same entity that’s now forcing families to spend hundreds of dollars more on their mortgage, assuming they’re lucky enough to have found an inexpensive home in the first place.
As you can read in my previous Invezz analysis article, the average household with an average income is now paying $800 more per month on their mortgage payments compared to before the COVID era (remember the good old days?). Yes, good luck with this whole concept of saving more. Good advice, Tiff Macklem, Governor of the Bank of Canada.
Even those at the higher end of the economic spectrum struggle to save more money in this environment. According to Bloomberg one-third of Americans earning a quarter of a million dollars a year live on paychecks overnight.
“Not an easy solution”
Invezz analyst Dan Ashmore tells me there is “no easy fix” and central banks, including Canada, must be careful not to hike rates to the point where they trigger a recession. He notices:
As global inflation has moderated in recent months, the market is now turning its attention to a possible recession, which is the biggest fear. Mortgage holders are just a subset of the people who will feel the pressure — the price that will have to be paid to bring inflation under control
Ironically, I should note that rising mortgage rates are now the largest contributor to inflation in Canada.
However, it is important to remember that homeowners faced with higher expenses have seen their assets appreciate in value over the years. This is the case if they bought their property a few years ago, as property prices have fallen compared to 2022. Dan adds:
Tenants see the price increase and get nothing in return. And low-income people pay a higher proportion of their wages for groceries and other essentials, which are also increasing, in some cases at alarming rates. They had no assets to take advantage of the inflation that has pushed all assets higher over the past two years.
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