a Controlled Interest Rate Hike Won’t Solve Inflation: Bank of Canada survey suggests businesses, consumers expect high inflation for longer – January 17, 2022,
Canada’s central bank at this point can’t do much to stop inflation, although some would like to imagine that the central bank raising interest rates will stop inflation, the reality is that it probably won’t, it might temporarily, but shortages of things we import, can’t be solved by raising interest rates a few percentage points. I’m not even sure if raising interest rates a few basis points will stop housing prices from going up in Canada because most of the investors in Canadian real estate are betting big that inflation is here to stay.
The Bank of Canada survey that predicts inflation, claims that inflation will be higher than the central bank is willing to raise rates. Now, remember that inflation was not matched by the Bank of Canada by raising rates in 2021, so 2022, will be inflation compounded. meaning that if the central bank were, to be honest, interest rates in Canada would be at about 6%.
Obviously, that’s not going to happen, ignoring the housing bubble for a moment, let’s consider government debt? if the central bank raises rates, to 4%, the Canadian government is bankrupt and will most likely have cut back on promises it made to voters. Debt servicing in a higher interest rate environment is very difficult for a government that doesn’t want to default to a crown corporation, in which it can potentially fire the Bank of Canada Governor and put in someone more dovish.
Furthermore, because an interest rate hike will likely lead to a recession, there will be immediate calls by all the lobbyist groups to return to the lower interest rate policies. What this obviously equates to is more inflation thereby equating to the poor getting poorer. In fact what may start happening is that Canadian homeowners might start getting poorer, even as the prices for the homes increase.
More inflation equates to higher SERVICING costs, wage earners are going to want a pay increase to match the inflation numbers and this recalibration of prices can be disastrous for people who are NOT cash flow positive. Capital appreciation is great if you sell, but let’s say you sell your residence, you’re losing your standard of living, and in this modern economy, how long can a million dollars last a person? who is cash flow negative?
Inflationary environments will test a person’s financial IQ, housing as an example got a head start so if you made a lot of money flipping real estate, that’s great, but if you can’t do that again and you’re not cash flow positive, this coming inflationary economy is going to eat away at your earnings. So it will be interesting to see how this plays out.
I personally anticipate austerity measures, but it’s not a guarantee, I can’t guarantee the government will be shrunk, people who like big government are going to look to reform and this could a decade or more, you never know. What’s known is that there is no appetite to raise interest rates are cut regulations on the economy, which equates to more consumer price inflation, so prepare yourselves accordingly.
Interesting times ahead!