This morning saw the Bank of Canada – our non-partisan central bank that stewards Canada’s economic interests and monetary policy – cut interest rates by 25 basis points (.25%) as we ready for the impending trade war with the United States.
Interest rates are a blunt instrument the Bank of Canada uses to, amongst other things, deal with inflation. And, as you may have heard, inflation has been a problem in Canada.
The reason for why everything costs more than it once did is complicated and controversial, with differing opinions on the cause. But everyone can agree that inflation (the cost of goods and services) must be lowered.
To help do that, the Bank of Canada raised interest rates between March 2022 and July 2023, increasing the amount of money people owe on loans. (For every dollar someone borrows, interest is charged. When interest rates are raised, the percentage owed on the principal increases.)
Why would the Bank of Canada cost Canadians more of their hard-earned money? Well, if people owe more, the theory goes, they’ll spend less. And that’s what was needed to lower inflation: fewer consumer purchases decreases demand for products and as supply grows, prices drop. That’s just economics 101.
But there were other incentives for the Bank of Canada to raise interest rates, too. If the demand for goods diminished, the hope was that supply chain pressures would be eased as well. (COVID, strikes, and floods/fires have all wreaked havoc for years on the transportation services that deliver our goods, often from overseas markets. This created a massive backlog that limited supply during a time of demand, further driving the inflationary cost of goods in Canada and other nations.)
The downside of the Bank of Canada’s actions, of course, was additional financial pressure on Canadians who were already struggling with inflation and the ramifications of COVID-caused shutdowns. After all, most Canadians owe money – for cars, houses, or unpaid credit card bills. (Pro tip: never owe credit card debt!)
All of that is the background for today’s announcement. With inflation dropping, the Bank of Canada felt it could start lowering interest rates again as of June 2024, with today being the latest cut, encouraging Canadians to spend more to grow our economy – something of particular importance as the nation faces US President Donald Trump’s tariff threat.
But was this latest rate cut by the Bank of Canada the right move? Will it help Canadians who are struggling? Has the inflation beast been slain, or is this simply a response to political pressure? What does it mean for bigger issues, like an economy struggling with productivity and facing Trump tariffs? And what might all of this mean for other pressing issues facing Canada?
Good questions and here are a few articles we think are worth reading:
Bank of Canada cuts key rate with ‘trade war storm’ on horizon
Here’s how the BoC rate cut could affect Canadians’ pocketbooks
Interest rates ‘still too high’: What economists say about latest Bank of Canada move
‘A tale of two economies’: Experts react to latest BoC rate cut