If you’re desperate for relief from high borrowing costs, the Bank of Canada’s decision to leave rates untouched on Wednesday has to be frustrating.
The economy contracted in the second quarter of the year, while the year-over-year inflation rate fell from a recent peak of 8.1 per cent to 3.3 per cent in July. Economic growth and inflation are fading – why not rates?
The reason is that the Bank of Canada has to be sure inflation is tamed, a goal even people struggling with high rates should support. The pain of high rates will pass, but the damage caused by inflation is permanent. Beating down inflation could not be more important.
Rates have been rising since March 2022 and now weigh heavy on people with debts. As described in this newsletter last month, a reader recently noted the toll high rates are taking on borrowers and asked why this can’t be stopped. Another reader just shared a petition asking the Bank of Canada to start lowering rates – it had 813 signees.
Lower rates would provide the relief these borrowers badly want, need and deserve. People with floating rate debt like lines of credit and variable-rate mortgages would benefit immediately, while those with fixed-rate mortgages would benefit more gradually as they hit their renewal dates.
While the path to rate relief is not clearly marked, it’s out there. The pain of high rates will ease.
The damage caused by inflation is different in that it persists. Every month of inflation is like a rising floor on the cost of living. The Bank of Canada’s own inflation calculator shows that something priced at $100 in 2020 would cost $115.23 in 2023 based on a three-year average inflation rate of 4.8 per cent.
Victory over inflation means a lower inflation rate, not a decline in prices. The average rise in the cost of living over the past 30 years was just over 2 per cent, low enough that it hardly came up in talking about personal finance. That’s where we’re headed if the rising cost of living can be reduced further from current levels.
Not everyone agrees that high interest rates are the best tool to get us there, largely because of the undeniable burden they place on vulnerable borrowers. Robert Reich, a former U.S. labour secretary, has argued that inflation is driven by corporate profits, and that taxing these windfalls is the best way to contain price increases.
The Bank of Canada’s own study of inflation and corporate profits found that price increases had little effect on inflation over the past three years. Bottom line, the case for corporate greed fuelling inflation has not been nailed down. Accordingly, we need the proven inflation-deadening powers of high rates.
Critics of using high rates to cool price hikes question whether the policy is working – inflation has been a problem for almost two years now. In particular, prices for groceries and housing keep rising sharply.
But high rates are slowly producing results. The broad inflation rate for goods and services is in sight of the Bank of Canada’s preferred zone and spending momentum is easing. In a recent bulletin, TD Economics noted a “tepid” rise in purchases at grocery stores, general merchandise stores and gas stations.
The risk in lowering rates right now is that spending picks up and reignites inflation. We can’t afford for that to happen.
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Rob’s personal finance reading list
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Housing and food, not drugs and alcohol
A Canadian study trashes stereotypes about how homeless people spend money. Extra funds are most likely to go into transit and clothes as opposed to booze and drugs.
Cheapest cities for international students
Winnipeg takes top spot. Don’t bother looking for Toronto and Vancouver.
Q: I have US$200,000 to invest to leave to my heirs. Any suggestions?
A: Without knowing your age, investing background and willingness to expose the money to stock market risk, we’ll have to stick to generalities. If you emphasize protection of your capital and modest growth, five-year guaranteed investment certificates paying 5 per cent and up are worth a look. If you expect the money to stay invested for at least five to 10 years and are OK with financial market ups and downs, a diversified portfolio of stocks and bonds offers the most growth potential. At the simplest, this could mean buying an asset allocation exchange-traded funds with a mix of bonds and stocks from Canada and the rest of the world. Asset allocation ETFs are available with various stock-bond mixes. Taxes are a consideration if you’re investing in a non-registered account. GIC and bond interest is taxed as regular income, while dividends and capital gains receive more preferential tax treatment.
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.
We want to hear from you
Is inflation affecting your RESP contributions and preventing you from getting the grants they offer? How are you shifting your investment strategies to account for the rising costs of being a student?
Globe reporter Salmaan Farooqui would like to hear about the increased challenges saving for your children’s education. Reach him at firstname.lastname@example.org
Tools, Explainers, Guides and Charts
A rundown on the different types of investment income
The Money-Free Zone
The 150 best albums of the 1960s. I know, boomer city. But take a look – so much great rock, soul and jazz music from all over the world.
On social media
A painfully accurate observation about investing in stock markets outside North America – it hasn’t paid off.
In case you missed these Globe and Mail personal finance-related stories
– Three key issues common-law couples need to consider in their estate plans
– A stalwart newsletter disappears, and subscribers wonder if investing will ever be so easy again
– When should I start my CPP pension? That depends on wage and price inflation
More Rob Carrick and money coverage
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Even more coverage from Rob Carrick:
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- 📈 Investing: Canada's top digital broker is TD Direct Investing, with an assist from the TD Easy Trade app • 2023 Globe and Mail ETF buyer's guide part one: Canadian equity ETFs • For the ultimate in cheap investing, check out the Freedom .08 ETF Portfolio • Yes, there is risk in Canadian bank deposits for the unwary and complacent • CDIC covers bank deposits, but who protects your investments if your broker goes bust? • Answers to your questions about the low-risk ETF paying almost 5% • Happy fifth birthday to one of the all-time best investing products for everyday people • An investing strategy that wins cleanly over the long term by outperforming in bad years like 2022
- 💰 Your money: Mortgage holders, savers and GIC investors, it’s time to change your thinking on interest rates • How much debt is each generation of Canadians carrying, and how do you compare? • For the sake of their financial futures, young people should leave Toronto and Vancouver • This practical new spin on a savings account might just peel you away from your big bank • Rental fraud grows amid rise in fake, falsified tenant applications • Are Canadians worse off financially now than in the 1980s? • From groceries to auto loans, here’s how much more it costs to live right now • When saving for retirement, should you change your asset mix over the course of your career? • Do retirement income needs always rise alongside inflation? Not necessarily • When the bank suggests you lock in your variable rate mortgage, it has an angle