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The Bank of Canada’s governing council, led by Tiff Macklem, will either keep the policy rate as is or launch a possible series of increases starting this Wednesday.Justin Tang/The Canadian Press
John Turley-Ewart is a contributing columnist for The Globe and Mail, a regulatory compliance consultant and a Canadian banking historian.
Making ends meet may soon be harder. The Bank of Canada’s governing council, led by Tiff Macklem, will make the determination. It will either keep the central bank’s policy rate as is, at 2.25 per cent, or launch a possible series of increases starting this Wednesday.
For many if not most Canadians, the prospect of higher interest rates could not be more ill-timed. If you own a house or want to, if you have a job or need one, run a business or plan to, or you are just keeping your head above a sea of debt, the Bank of Canada decision will be personal.
Mr. Macklem recently indicated the bank’s decision amounts to a calculated answer to this question: Will inflation, driven higher by energy prices to 3.1 per cent in September, revert to the bank’s 2-per-cent target six months to a year from now? To pretend to guess well in the current geopolitical context amounts to economic astrology.
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In August, Russian intelligence agents allegedly launched a drone attack against a cargo plane on German soil. Last week, The Wall Street Journal reported that Iran’s grip on the Strait of Hormuz has weakened considerably and “Persian Gulf oil exports have surpassed prewar levels.”
And recent news suggests the Trump administration, in addition to waiving Congress-approved sanctions against Russia, may be trying to force a false peace on Ukraine to secure Russian and Chinese pressure on Iran to end its war with the United States and Israel.
These are the highly unpredictable realities of our time. But forecasting the consequences of rate increases in Canada is a more certain business.
Canadians with variable-rate mortgages (a floating rate that rises or falls in tandem with the BoC policy rate) and with lines of credit secured by the equity in their homes will pay more in interest, leaving less money for other costs.
Those renewing a fixed-rate mortgage are already facing higher rates in anticipation of the BoC moving its rate up. If you want to buy a house, qualifying for a mortgage from a chartered bank will be harder. Trying to sell homes will also be fraught, as increased interest rates are likely to push down home prices.
If you are a home builder, increased rates are yet another reason to shelve projects indefinitely. Investing in business is also affected, as the cost to borrow is higher, and the ability to pass those higher costs on to customers is limited because aggregate demand for goods and services in the economy is reduced.
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In plain language, consumers don’t have enough disposable income to pay for goods and services they want because that much more of their income must be devoted to servicing their debt. And that debt, in Canada, is sky-high.
A recent TransUnion report points to a record $2.64-trillion in consumer debt weighing down the balance sheets of households across the land. That amplifies the impact of BoC rate increases.
Mortgage delinquencies are up in Ontario, Prince Edward Island and British Columbia, and at least one consumer insolvency firm in Ontario that tracks bankruptcy statistics is reporting the highest number of homeowner bankruptcies it has seen since 2016.
Unemployment remains sticky at 6.5 per cent nationally. According to Statistics Canada, the country lost 68,000 jobs in September, after the previous month’s decline of 42,000, all of which follows softening real income growth.
Is it any wonder that food bank usage in Canada has more than doubled since 2019? The country is seeing 2.35 million food bank visits a month, according to Food Banks Canada. Almost 20 per cent of people using food banks have jobs.
Chasing a 2-per-cent inflation target is a laudable goal in typical times when economic models that rely heavily on historical data have a better chance of being right. Yet, these are not typical times.
If the Bank of Canada increases interest rates this week, it is mathematically certain that the living standard of many Canadians will continue to decline, as more of their income is directed to interest payments and less of it is available to help fight what Prime Minister Mark Carney has characterized as a trade war.
This raises the question: Is it better to battle inflation or win the trade war?