Premier David Eby slammed the decision of the Bank of Canada to raise a key interest to its highest level in 22 years.
“This is devastating news for families that have debt,” Eby said Wednesday as the Council of Federation wrapped up its three-day meeting in Winnipeg. Many families and businesses, borrowed money to get through the pandemic, he said.
“They are struggling under the weight of that debt and you really have to wonder when the Bank of Canada is going to take a pause and see what the impact of this is going to be…frankly, I don’t believe in solutions that come at the expense of the poorest people,” he said.
Eby’s comments come after the Bank of Canada raised its overnight lending rate by 25 basis points to 5 per cent. On April 13, 2022, the rate was 1 per cent.
The Bank of Canada, like central banks around the world, has been steadily raising interest rates to fight inflation in the face of excessive savings during the COVID-19 pandemic and rising energy prices following Russia’s invasion of Ukraine.
While global inflation is easing thanks to lower energy prices and declining prices for various goods, “robust demand and tight labour markets are causing persistent inflationary pressures in services,” the Bank of Canada said in a statement.
What the Bank of Canada calls a “policy of quantitative tightening” to fight inflation means British Columbians will pay higher interest rates on mortgages, lines-of-credit and other loans, with some feeling the pinch more than others.
The bank acknowledges this point in a separate report accompanying its rate decision.
While the financial positions of many households remain healthy because of strong labour markets and the buildup of large savings since the beginning of the COVID-19 pandemic (especially among wealthier segments of the population), a “smaller portion of households” are experiencing considerable financial stress, it reads.
“While most indicators of household financial stress remain below pre-pandemic levels, there are signs that some households are relying more on credit card debt and some have fallen behind on their payments,” it reads. “These households are likely to cut their spending by disproportionately more than others.”
The bank also acknowledges that the full effect of rate increases has yet to be felt by some borrowers. “Over time, as borrowers renew mortgages and other loans with fixed rates and payment schedules, more households will face higher debt-service costs,” it reads.
Leslie Preston, managing director, senior Economist at TD, is trying to put these developments into context.
“We have already seen over four percentage points in rate increases over the past sixteen months,” she said. “So it’s going to get a little bit harder to borrow to either fund the purchase of a new car or a new home, so it’s likely to hit the housing market (and) purchases of those longer-lived, durable consumers goods that people typically finance.”
This raises the question to what degree the Bank of Canada is working against the interests of British Columbians. Preston acknowledged that housing is most unaffordable in B.C., but said housing is not the only issue in play.
“About 35 per cent of Canadians have a mortgage,” she said. “All Canadians have to buy food and we have seen inflation for things like food just be at a 40-year-high and that is affecting everyone and it’s particular difficult for people who live on fixed incomes and this is what the Bank of Canada is focused on.”
Inflation is currently around close to 4 per cent, but has fallen from 8 per cent in June 2022. The Bank of Canada wants to see it back down to two per cent.
“(To) do that, they need to slow (down) the economy,” Preston said. “There is a metaphor that is often made about central bankers: their role is to take away the punch bowl, just as the party is at its peak and that’s what they are doing.”
While the people at the party might not be happy with that decision, bringing down inflation to keep it low and stable helps foster growth over the long-term, Preston said, adding it also restores the purchasing power of Canadians.
“It makes it easier for businesses to plan, for individuals to plan for retirement and the Bank of Canada was successful at that objective for many decades,” Preston said.
Canada runs the risk of entering a period during which businesses and individuals expect inflation to be around four to five per cent, she said.
“That can create a wage-price spiral and then you are back to the 1970s,” she said. Parts of that decade saw the worst of all possible worlds: rising prices and stagnating economic growth.
“So the Bank of Canada is squarely focused on bringing inflation back down to target. Is it going to cause economic pain? Yes, that is part of it.”
So when will the pain end?
“We don’t expect inflation to get back down to two per cent until 2025,” Preston said. While inflation could be below three per cent next year, it is going to take time because demand for services remains high, she added.
One reason is wealthier household have more built-up liquidity than poorer households, she said.