A reader got in touch the other day for help understanding why the Bank of Canada is beating us up with rising interest rates.
Rising rates mean he’s paying hundreds of dollars more a month in interest on his home equity line of credit. “For lower- and middle-class folks with mortgages and HELOCs, we are getting a sledgehammer to the head,” he wrote in an e-mail. “Please explain how the Bank of Canada’s inflation fight is helping everyday Canadians.”
OK, here goes. Inflation is too high and the only way to bring it under control is to keep raising interest rates until cost of living increases decline back to between 2 and 3 per cent, instead of the 6.9 per cent rate in September. High rates cause people and businesses to spend less, thereby reducing demand for products and services. As demand falls, so should the rate of inflation.
Rising rates are a sledgehammer – that’s a good description. But if the central bank doesn’t pound inflation down, then we end up with rampant inflation, rising unaffordability and a declining standard of living. If wages go up as a result, then businesses raise their prices to compensate. The end result is a feedback loop of economic agony that is worse than what we have now in the economy.
The financial stress felt by households as a result of rising rates must be acknowledged. Hundreds of dollars more are being spent per month, with zero benefit. You’re paying more just to stay in place. Meanwhile, the inflation that keeps driving rates higher is costing you more every time you walk into a food store, gas up your vehicle or turn your furnace on.
Ultimately, what makes inflation so terrible is that it necessitates interest rate increases that bring misery to borrowers of all ages. There’s an offsetting benefit in that rates for savers go up. But there’s no consolation here if you have to stop saving to cover your HELOC or mortgage.
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Rob’s personal finance reading list
A new high in people feeling down about their finances
A pollster says the percentage of people who feel they’re financially worse off has reached higher levels than during the 2008 recession and in the early stage of the pandemic. And this is before a recession. Now for a worrying sign of financial distress: credit card balances have reached record highs.
Good news, bad news on the economy
Former Bank of Canada governor Stephen Poloz says the country’s housing market is supported by strong fundamentals, which suggests we’re not on the verge of a crash. That’s the good news. The bad is that we should expect a recession, although a short one.
Fighting inflation: What to cut?
A study finds that one in three people have cancelled at least one subscription in the past six months. A thought: rotate in and out of a few services so that you’re only paying for one or two at a time.
If you’re buying an EV
A thorough roundup of incentives for buying an electric vehicle. Find out if your province offers anything.
Ask Rob
Q: I’m a 32-year-old with savings for a purchasing a home when the time is right for my partner and I – ideally in the next year or so. I’d like to take advantage of high interest rates on savings accounts, but my bank is only offering 1 per cent. To avoid the hassle of opening a new account with a new bank, what’s your opinion on putting this money in a high interest savings exchange-traded fund in my brokerage account?
A: One per cent on a savings account is at the low end for sure. A high interest ETF might earn you about 4 per cent, but you’ll undercut that if you have to pay brokerage commissions for buy and sell transactions. Getting a higher rate of interest from a savings account at another bank is actually no hassle at all. Many alternative banks allow you to open the account online in a matter of minutes. Suggest you check out the banks with the highest savings rates on this list and then try an online account opening.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
A useful primer on the fees associated with investment advice and products, from the British Columbia Securities Commission.
The Money-Free Zone
Dare you not to like this Jackie Wilson song.
We want to hear from you
Are you a working adult who has moved back in with roommates because of high housing costs? Are you in your 30s or older? We’d love to interview you for a Globe personal finance story. Contact hello@andreayu.ca with a short paragraph about your situation. Thanks in advance.
ICYMI
What I’ve been writing about
- Where to park money safely and keep your self-respect as an investor
- Holster your HELOC, borrowers. Rising rates make them too expensive
- For the sake of their financial future, young people should leave Toronto and Vancouver
More Rob Carrick and money coverage
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Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Is the middle class dead for millennials and Gen Z? • Gas prices are soaring. Are electric vehicles an affordable solution? • Crypto is booming, but should you invest? • How are young Canadians dealing with soaring rents? • Inflation is squeezing our finances. What can we do about it? • Is a hot housing market squeezing Canadians out of their small towns?
- ✔️ The housing file: How bad is housing affordability? Even a crash won't help • Sell the family home to lock in profit and then rent? Better not • Why young adults can't afford houses: Hard work got you more in the past than it does now • Five reasons you should not buy a house till you're at least 30 • Now more than ever, owning a house is not a retirement plan
- 📈 Investing: The 2022 ETF buyer's guide: Best Canadian equity funds • The 2022 Globe and Mail digital broker ranking: Does the zero-commission revolution flip the script on who's best? • With bonds sinking, conservative investors are waking up to risks they never saw coming • A five-step plan for dealing with the sad fact that almost every investment is falling lately • The best financial advice in advance of retirement? Work on your marriage • One-year GICs are the best deal in town for safety seekers • What to do if the financial plan you paid thousands for disappoints
- 💰 Your money: Are you prepared for the pandemic wealth boom to blow up in our faces? • This hard-working 24-year-old is nailing it financially. But where’s the happiness? • Who should and shouldn’t worry about the wave of rate increases this year, and what every stressed-out borrower should do right now • Don’t make this potentially costly assumption about the CPP Survivor’s pension
Rob Carrick