Is the Bank of Canada making things worse?
Is the Bank of Canada making things worse?
The central bank is raising rates to fight inflation. No one else seems willing to help
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I don't think they're making things worse, but as the article states, governments could be doing more. Incentivize purpose built rental units, provide better food security supports instead of parachuting money in.
I don’t think they’re making things worse
Why's that? Take a look at the CPI data sometime. Inflation is within the 2% target range if you exclude mortgage interest costs. Inflation is high specifically because of high interest rates pushing people to spend more on mortgages. Is it that you don't think the BoC has any impact on interest rates?
yo, that's not how the policy work. The increase is to stop extra money pumping into market because if you try to borrow and do stuff, then the cost is higher, ANY borrowing. (so business, house, car, etc. )
ie. if you are selling apple using borrowed money because the revenue-cost is positive enough to do it, interest rate increase will help stop you buying more apple(for resale) down the road. "but I can just offset the cost to consumer that buys my apple, right?" Yes you could but for merchant that does not need to borrow money to do it they have an edge over you. So while short term you will see people jack up price of apple to cover their bottom line, eventually, there is a point they can't get price up anymore to cover cause people will switch to buy orange instead. So people will do less risky business that involves borrowing money. And consumer just pick whatever they can afford. So if there is a trend that apple is too expensive, it will stick and lag behind, it affects all the way to produce as well and some apple selling business will close, and farm would cut production if people are not buying, then if this goes on longer, they will have to lower the price to recoup the money compare to losing everything. And people that originally think borrowing money to invest in apple will think hard(if they have good advisor), thus not much money in this "apple" market. Interest rate increase affects almost all industry, but the price coming down, to historical trend of inflation, will lag behind and are not immediately visible.
That's also why too few competition in grocery is bad cause you have to eat, for business that people have no choice but had to buy/use to survive, they should be regulated. ( Just imagine if your provincial water supply is a public traded company. )
Best to make sure you press the right reply button. Comments are easier to read when they stay within the same thread they are meant to pertain to.
Inflation is high specifically because of high interest rates pushing people to spend more on mortgages.
I am replying to you specifically in response to this sentence. I just use a apple selling business as example. No one has to buy mortgage to buy house, raising interest rate actually will fail the stress test for some people about to buy.(Thus they can't even start borrowing process.) Thus pull potential money out of that market. Then somewhere down the road, the price will fall back to historical trend. So what if people already bought and can't affordable to renew? They would try to sell, pay the penalty if any, compare to go default. Which also pull money out of housing market, eventually.
No one has to buy mortgage to buy house
People don't have to buy anything. But they are buying mortgages, and the rising cost of mortgages is what is causing high inflation. If the mortgage vendors dropped their prices, inflation would be within the target range.
And because mortgages are debt, it's a funny situation as debt shrinks with inflation. The higher the inflation, the more compelling debt becomes – hence why rates rise to try and scare people away.
But with interest costs being the driver inflation this time around, we're entering an interesting feedback loop. The higher the interest rates go, the higher the inflation goes, the more compelling taking on debt becomes, the higher inflation goes, the higher the interest rates go, ...
raising interest rate actually will fail the stress test
- The stress test only applies to federally-regulated banks. That is hardly the only source of mortgages.
- Wage growth is accelerating. Last year we were looking at 2.5% growth per annum, and now we're at 5%. The capacity to take on more and more mortgage expense is there even with the stress test in force.
https://www.bankofcanada.ca/core-functions/monetary-policy/
I am just going to leave this here, and if you don't trust BoC, maybe check other literature that explains how central bank, over night rate, etc works to control the market. Cause you seems to have a misunderstanding on how this work if my apple business example above don't work for you.
Your apple business example is fine, and if apples were driving inflation then higher interest rates would quash things pretty quickly. But we're in a situation where it is interest costs themselves which are driving inflation. I'm not sure that has ever happened before. Certainly not in any recent memory.
As before, debt becomes more appealing when inflation is high. If we, for argument's sake, had 100% inflation YoY, a $100,000 loan today will have a principal balance of just $50,000 (constant dollars) next year. That is one hell of a steal! As such, demand for loans increases with inflation, and the cost of acquiring loans (interest) begins to rise to find equilibrium – basic supply and demand.
The trouble we're in is that each time the rates go higher, so too does the cost of borrowing, which in turn sees inflation go higher with borrowing costs being the thing causing inflation this time, which makes debt more appealing and able to burden higher rates – later, rinse, repeat.
Keep in mind that they manipulate the CPI to make it look not so bad.
For example, if the price of a luxury item spikes by 50% (like a lot of grocery items did in the last year), they'll remove it from the basket and put in a cheaper alternative instead. The idea is that what people would do, but the result is a figure that doesn't represent actual price increases.
The main purpose of CPI is to see if Canadians can still make ends meet. It's not supposed to express price increases, but cost of living increases.
People change their habits as prices change. That's well-known.
So maybe it should be called the Buying Habits Index then.
We could call it the Cost of Not Dying if you prefer
Makes sense. Inflation is trying to determine the value of currency as you can't just ask how much a dollar is worth. Of course, a dollar is always worth a dollar! Which means nothing as we know a dollar today isn't worth the same as a dollar yesterday. Thus, CPI becomes the proxy.
If a luxury item becomes more valuable, then you're no longer measuring the change in value of the currency, you're measuring the change in value of that item. It can never be an exact science, but if one thing jumps by 50% when nothing else has, there is extreme confidence that it is not the change in value of the currency that resulted in the change in price and it stands to reason that you would want to eliminate it from the calculation.
It's not meant to measure inflation. It's supposed to measure the cost of consumer goods, but instead they say it's about "overall cost of living" to justify the manipulation.
It’s supposed to measure the cost of consumer goods
Because consumables are what are frequently purchased to be able to observe inflation taking place.
It wouldn't make sense to track houses, for example. People only buy those once, maybe twice in their life. You would have no idea how their perception of the value of the dollar is changing watching that.
But it doesn't make sense to change the basket from having 7 portions of meat to having 3 portions of meat and 4 portions of tofu (example pulled out of my ass, but the principle is the same as what's being done). That's what people do because of inflation to reduce their spendings, it still means that the number reported has nothing to do with real inflation.
Real inflation/deflation is the variation of price of specific items over time. You could absolutely check inflation of housing by comparing the price of thousands of houses that respect some criterias over time without changing the criterias.
Worth noting that's only if you include gas prices which aren't really controlled by anything Canada can do. Exclude them and you're still above the target range.