Posted at 7:00 a.m.
Could you explain the link between inflation, the key rate and bank interest rates?
Myriam Ariey-Jouglard
We hear a lot about the key rate which was supposed to increase, but which will probably do so in March. How is such an increase a brake on inflation?
Jacques Beaudet
In order to answer these questions, The Press called on David Dupuis, economist and lecturer, head of the bachelor’s degree in economics, School of Management, Université de Sherbrooke.
“The causal link goes from the key rate to the bank rates and then influences inflation. Currently, the inflation rate is very high in Canada [4,8 %]. The central bank will want to raise its key rate, which will drag all interest rates along with it: mortgage rates, rates on personal loans, on corporate borrowing rates, on all interest rates. risk and term loan.
“What this means for Mr. and Mrs. Everybody is that the effect of the rate hike will be direct on the portfolio for those who have borrowed in the past at variable rates. The effects will be less direct on people who have borrowed at a fixed rate or those who have not yet borrowed, but it could call into question the intentions to buy a house, a car, for example, if the use of credit is necessary. Rising rates are therefore an incentive to reduce consumption and investment made through borrowing and to increase savings. These changes in behavior will reduce the pressure on the economy’s production capacity and eventually push inflation back towards the 2% target set by the Bank of Canada.
“But it takes time for these effects to ripple through the economy, although the increase in bank rates is immediate. It generally takes 6 to 18 months for the behavior of certain actors to change. Moreover, it is generally accepted that the increase in the key interest rate will affect inflation to its full extent within about two years. A timeframe that seems to have stretched a bit over the past decade, however. It highlights the idea that the Bank of Canada must act preventively. It must act today so that inflation is at the 2% target in two years. No small feat. »
Inflation has been high for several months now. Why is the Central Bank of Canada delaying raising its key rate?
“One of the reasons for high inflation is that supply seems temporarily constrained. Supply chains are still dislocated, the labor market is still looking for some benchmarks, transportation costs are high and the floods in British Columbia clearly haven’t helped. Supply is struggling to meet demand. So even if the central bank raises interest rates quickly, it won’t help companies produce more. The Bank of Canada deemed the supply problem to be temporary. It therefore waited to act, believing that when production resumed, the pressure on inflation would subside on its own.
“That said, the temporary supply problems are becoming more persistent and many observers believe that the central bank is a little late in starting its credit tightening cycle. The danger right now is getting into a perfect storm. One where the high inflation of recent months is pouring into higher salary expectations to rebuild the purchasing power of a workforce that is becoming increasingly scarce. The danger of entering a wage-price spiral is real. And it’s quite a balancing act that awaits the Bank of Canada over the next few months: stemming inflation without curbing economic growth and the healthy progress of the job market. »
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