Who benefits from the Bank of Canada’s interest rate hike?

If analysts are right, the Bank of Canada is about to make life harder for most Canadians with its next scheduled rate hike.

Out of control inflation is pushing Canadians to the brink while filling the pockets of Canadian businesses, including various banks and major oil companies. The decisions of the Bank of Canada (BoC) lead us further down the path of inequality and economic uncertainty. Key affordability issues include rental housing and mortgage payments.

While the bank touts recent interest rate hikes as a bitter remedy needed to curb runaway inflation, the solution is an oversimplification of how the economy works.

The bank stimulated an overheated economy through quantitative easing policies and flooded the market with too much credit at the height of the pandemic. The 2010s were a decade marked by historically low interest rates, capped by federal stimulus measures during the COVID-19 pandemic that brought the cost of borrowing in some cases down to 0% or even low levels. negatives.

Indeed, Canadians had taken advantage of these historically low interest rates by buying homes, many with variable rate mortgages. Since then, demand has exceeded supply, and the Bank of Canada’s solution is to increase the cost of borrowing and reduce the disposable income of Canadians.

The reality is that lower borrowing costs during the pandemic have caused households to take on After debt as capital repayments pushed housing markets to record highs in major cities like Toronto, Vancouver and Halifax. In short, people adjusted their budgets to cut interest rates and were forced to pay higher costs for a 10-year overheated housing market.

In 2022, those with adjustable rate mortgages are starting to feel the pinch. Some may be forced to sell their home because they cannot afford their current payments. This could lead to lower housing affordability in the short term; however, the biggest issue is the affordability of rental housing, with ever-increasing rentsas more and more people seek housing in condominiums and apartment buildings in metropolitan cities across Canada.

Economists traditionally argue that raising a federal bank’s target rate will reduce demand by increasing the cost of borrowing for things like homes, automobiles and other investments. The idea is that by reducing the demand for goods and services, the rate of inflation will fall; however, this does not take into account recent disruptions to global supply chains.

Indeed, the Canadian Center for Policy Alternatives published historical analysis in July which revealed that the Bank of Canada had never managed to control inflation by raising the target interest rate without causing a recession. On the contrary, successive increases in interest rates could create “considerable collateral damage” in the form of higher unemployment, in addition to increased consumer debt service on their home loans, auto loans and their credit cards.

So who benefits from these interest rates? For banks, interest rate hikes mean increased profits from existing debt. The Royal Bank of Canada posted a record profit of $1.97 billion from their commercial banking activities, which they directly attributed to the growth in residential mortgages. Likewise, companies have posted record profits since the start of the pandemic and according to some analysts caused the market to overheat in the first place.

Solutions outside of monetary policy include Universal Basic Income – a policy platform that the majority of Canadians support, More generally, the federal government could engage in a host of fiscal policy tactics, such as controlling rents and increasing the corporate tax rate that has been steadily falling for over 20 years .

These are examples of the radical political interventions that we need to see happen to support Canadians. Instead, the BoC and Canadian corporations expect consumers to bear the burden of high interest rates while they operate “business as usual.”

Ali Bhagat is Assistant Professor of Global Development Studies at Saint Mary’s University in Halifax Marc Calabretta is a PhD student at the University of Toronto.

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