One foot on the Gas, One Foot on the Brake
This week, the Bank of Canada (BOC) is expected to raise interest rates once again (the 7th such increase in a year). The Bank’s benchmark rate is expected to increase by .25% to 5%.
Another rate hike is bad news for Canadians who are already struggling to make ends meet.
Within hours of the last rate hike announcement in June, Canada’s major banks hiked their prime lending rate to 6.95%. This new hike could see the prime lending rate exceed 8%.
With this latest hike, Canadians will have seen interest rates increase by 1000% since March of 2020. A 500% increase in the past year alone.
Back in 2019 nearly half of Canadians were already within $200 of being able to pay their bills and service their debt. Today, after another four years of Justin Trudeau, for many that seems an enviable position.
Recent BOC increases in interest rates have already added more than $1,000 per month to the cost of a $500,000 home. The Canadian average home price is just over $700,000 (up $100,000 since January). In major cities like Toronto or Vancouver the average home price in over $1 million. This increase will see those folks pay an additional $2,000 per month (raising a monthly mortgage payment from $5,000 to $7,000). A recent Ipsos poll showed more than 60% of Canadians could not afford a one-time $1,000 emergency payment let alone an additional $1,000-$2,000 per month.
Those who rent will not be immune from the effect as the additional interest costs to landlords will be passed on through rent increases.
To be fair, the BOC’s mandate is to keep inflation at or under 2%. As such, they are taking steps to mitigate the effects of non-stop inflationary spending by the Liberal Government.
It’s the economic equivalent of driving a car with one foot pressing the accelerator to the floor (the Liberal Government) and the other pushing the brake to the floor (the BOC). Eventually your engine will blow which is exactly where Canada’s economy, particularly the housing market, is headed.
It’s not hard to see how we got here. The Trudeau government was already running unprecedented deficits long before COVID. When governments shuttered the economy during COVID, the Trudeau Liberals flooded the market with hastily borrowed and printed money. Conservatives warned that mass inflation would follow.
We were right.
In just under eight years, the Liberal Government has added half a trillion dollars to our debt, including $323 billion to “fight COVID” (though billions of dollars remain unaccounted for and tens of millions more have been shown to have wound up lining the pockets of Liberal cronies).
The Liberals are operating under a deeply flawed economic hypothesis called modern monetary theory (MMT). To put it in very simple terms, MMT is based on the notion that governments can accomplish their spending goals through money creation rather than taxation. That government can borrow, print, and spend indefinitely as long as they are doing so through their own central bank.
Unfortunately, reality gets in the way. Because, you can’t borrow or spend your way out of debt.
When you borrow and/or print money it increases the supply of available money which results in inflation. Think of a painting by a great master artist. If there is only one such work in the word the value is astronomical. However, if it is suddenly discovered that same artist painted one hundred identical paintings, the value plummets because there are more of them available. It is basic supply and demand: Your money is worth less because (thanks to Justin Trudeau) there’s more of it.
The more deficit dollars the Liberals spend, the greater the pressure on the BOC to continue to increase interest rates. It’s a vicious cycle. Add to that the fact that Canadians carry the highest household debt in the G7, and you have a formula for economic disaster.
Justin Trudeau is out of touch and Canadians are out of money. You can’t borrow and spend your way to prosperity, and you can’t get blood from a stone.
As the Liberal Government and the Bank of Canada continue to play games with Canadians’ finances, Conservatives will continue to propose and advocate for commonsense, responsible fiscal policies to lower the cost of living for Canadian families.