A B.C. economist says the Bank of Canada’s interest-rate hike Wednesday (June 7) was unnecessary.
The Bank of Canada raised its benchmark interest by 25 basis points to 4.75 per cent – the highest point in more than two decades.
With that comes higher mortgage payments and interest payments on loans for British Columbians, and Marc Lee thinks it was a mistake.
“The challenge for a big chunk of Canadian households with mortgages is that higher interest rates actually increases the inflation they are experiencing,” explained Lee, an economist in the B.C. office of the Canadian Centre of Policy Alternatives.
For those with a variable mortgage of $500,000, the total of all the interest-rate hikes going back to March 2022 is an additional $22,500 per year just in interest costs that you are paying to the bank, he said.
“This is actually a big deal for many Canadian households.”
On Wednesday, all major Canadian banks raised their prime mortgage rate to 6.95 per cent, up from 6.7 per cent, effective June 8.
The higher interest rates not only impact mortgages, but also personal loans, home equity lines of credit and business lending, he added.
Lee thinks the hike will not fight inflation, but worsen it.
“The Bank of Canada is raising rates because it is still concerned about inflation, even though inflation has already dropped substantially.”
Inflation dropped to about four per cent from just over eight per cent last summer, but the “overall GDP and employment have been more resilient to those interest rate hikes than what has been expected.”
Lee said the bank feel “compelled” to raise the rate again, even though most of the inflation being seen is from external factors, which includes higher energy prices largely connected to Russia’s attack on Ukraine, but also temporary supply chain issues caused by COVID-19 and natural disasters.
Overall, it takes 12 to 18 months for interest hikes to “ripple” their way through the economy.
“So we are starting to see some downturns business borrowing already, but that is really just reacting to interest hikes last year, not the current hike.”
Instead, Lee said an alternative to interest-rate hikes is to look at different policies that target some of the specific sectors of concern.
While the cost of carbon-based energy has spiked, cleaner alternatives did not budge in price, so government should invest in ways to reduce consumption of carbon-based energy by investing in policies that reduce their use in vehicles and buildings. He added it would help in the fight against climate change.
“The other thing that is important is that there sectors of the economy that have been making huge windfall projects, in particular the oil and gas sector, but also supermarkets and grocery chains and it would be entirely appropriate to impose a windfall or excess-profit tax on those companies and use that revenue to flow back to households that are squeezed.”
The hike could also lead to a negative scenario with credit-card payments.
While credit-card rates are already high – but generally more fixed – tighter budgets in other areas could see more British Columbians use their credit cards to pay bills, Lee said.
“Households that are more squeezed at the end of the month are going to borrow more on their credit cards, so the amount of debt on credit cards in total is going to be going up as opposed to the rates on those credit cards.”
Lee said government could also provide additional income supports, pointing to the federal grocery rebate and temporary measures in B.C.
“You can channel money directly to the folks who need it,” said Lee, adding that it could be paid through windfall profit tax.
“It’s not implausible … it’s really more about political will right now,” he said.