March 23, 2023

Explain how the Bank of Canada’s fight against inflation is really helping people

A reader reached out yesterday for help understanding why the Bank of Canada is hitting us with rising interest rates.

Rising interest rates mean she’ll be paying hundreds of dollars more per month in interest on her home equity loan. “For lower and middle class people with mortgages and HELOCs, we’re getting hammered,” he wrote in an email. “Explain how the Bank of Canada’s fight against inflation is helping everyday Canadians.”

OK, here we go. Inflation is too high and the only way to get it under control is to keep raising interest rates until the cost of living increase falls back to 2-3% instead of 6.9% in September. High prices cause people and businesses to spend less, which reduces the demand for products and services. When demand falls, inflation should also fall.

A rise in interest rates is a shock – that’s a good description. But if the central bank doesn’t bring inflation down, we’ll end up with rampant inflation, rising affordability and living standards. If wages rise as a result, companies will raise their prices to compensate. The end result is a feedback loop of financial pain worse than what we have now in the economy.

The financial stress of households as a result of rising interest rates must be acknowledged. Spending hundreds of dollars more per month for no benefit. You pay more just to stay put. At the same time, inflation, which keeps the rate higher, costs you more every time you step into the grocery store, fill up your vehicle, or turn on the oven.

After all, what makes inflation so terrible is that it requires interest rate hikes that cause misery for borrowers of all ages. Savers’ interest rates rise as a compensating benefit. But that’s no comfort if you have to stop saving to cover your HELOC or mortgage.

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Rob’s Personal Finance Reading List

A new peak where people are worried about their finances

According to the poll, the percentage of people who feel they are financially disadvantaged has reached a higher level than during the 2008 recession and the early stages of the pandemic. And this is before the recession. Now, in a worrying sign of financial distress: credit card balances have reached record highs.

Good news, bad news about the economy

Stephen Poloz, former governor of the Bank of Canada, says the country’s housing market is supported by strong fundamentals, suggesting we are not on the brink of collapse. That’s good news. The downside is that we should expect a recession, albeit a brief one.

Fighting inflation: what to cut?

The research shows that every third person has canceled at least one subscription in the last six months. The idea: rotate in and out of a few services so you only pay for one or two at a time.

If you are buying an electric car

A thorough collection of incentives for buying an electric car. Find out if your province offers something.

Ask Rob

Q: I am 32 years old with savings to buy a home when the time is right for my partner – ideally within the next year. I would like to take advantage of the high interest rates on savings accounts, but my bank only offers 1 percent. How about putting this money in a high interest savings fund in my brokerage account to avoid opening a new account at a new bank?

A: One percent of the savings account is definitely down. A high-yield ETF might earn you around 4 percent, but you’ll undercut that if you have to pay commissions on buy and sell transactions. Getting a higher interest rate from a savings account at another bank is actually not a hassle. Many alternative banks allow you to open an account online in a few minutes. Suggest you check the banks with the highest savings rates on this list and then try opening an online account.

Do you have any questions for me? Please send me. Unfortunately, I cannot answer each one individually. Questions and answers have been edited for length and clarity.

Today’s financial tool

A useful primer on fees related to investment advice and products from the British Columbia Securities Commission.

Cashless zone

Don’t you dare like this Jackie Wilson song.


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