Yesterday, the Bank of Canada announced its second consecutive rate reduction, bringing the key interest rate down to 4.5%. I find the Bank of Canada's recent monetary policies to be severely lacking. Their delayed response to inflation and subsequent sluggishness in cutting interest rates have, in my opinion, caused unnecessary economic pain, exacerbated household debt issues across the country, and negatively impacted the Canadian dollar.
When initial signs of rising inflation emerged, many called on the Bank of Canada to start a gradual but early increase in interest rates. However, the Bank chose to delay its hikes until mid-2022, by which time inflation had already soared to 8.1%—a critical misstep. Early signs of inflation were evident as early as late 2021, yet the Bank waited, allowing inflation to become deeply embedded in the economy. When they finally took action, it was too late to prevent the damage, leading to the need for significant rate increases that severely impacted borrowing expenses.
Despite assurances that rates would remain low, leading many to overspend, the Bank of Canada proceeded with consecutive rate increases, significantly increasing many individuals' debts and liabilities in a brief timeframe. This rapid and consecutive increase in interest rates led to higher mortgage rates and borrowing costs, slowing down consumer spending and investment. Mortgage rates skyrocketed, making homeownership unattainable for many and stifling demand.
The delayed response from the Bank of Canada has directly contributed to the surge in household debt. Canadians are now grappling with higher mortgage payments and increased borrowing costs amidst stagnant wages and rising living costs. The Bank’s tunnel vision focus on the 2% inflation target has overshadowed the broader economic impacts, such as increased unemployment and slowed economic growth.
I believe the Bank of Canada's strict focus on achieving its inflation target has been detrimental. By not considering the broader economic implications of their high-interest-rate environment, they have intensified the economic suffering of Canadians. The Bank’s policies have led to rising unemployment and a sluggish economy as high borrowing costs deterred consumer spending and business investment.
Even as inflation started to moderate in 2024, the Bank of Canada’s rate cuts may prove to be too little, too late. Lowering the key interest rate to 4.5% should have happened sooner to prevent the severe economic downturn we are now facing. By delaying these cuts, the Bank allowed the economy to deteriorate further, causing unnecessary hardship for businesses and individuals alike.
The broader economic impact of the Bank of Canada’s delayed actions has been devastating. Real GDP forecasts for 2024 have been downgraded, and the labor market shows signs of significant slack, with rising unemployment and slower job growth. The Bank now warns of a prolonged period of low inflation—a stark reminder of the consequences of their delayed actions. Additionally, the potential of a weakened Canadian dollar is lingering which would lead to increased costs for imported goods, further straining household budgets. These outcomes were avoidable to some extent had the Bank acted more promptly and balanced its inflation goals with the need for overall economic stability.
A more proactive approach to adjusting interest rates could have mitigated much of the economic hardship we face today. I hope we will see a more balanced approach, braver decision-making, and less tunnel vision in future policies.
The lessons from this period underscore the importance of timely and balanced policy decisions that consider both inflation control and the overall economic well-being of the country. The Bank of Canada must learn from these mistakes to better navigate future economic challenges and prevent further unnecessary hardship for Canadians.
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Full article: Bank of Canada's Missteps: Delayed Actions and Economic Consequences (rlpcommercialvancouver.com)
Raman Bayanzadeh CCIM - Full Profile: Raman Bayanzadeh (rlpcommercialvancouver.com)
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