Fresh Takes

Policy Interest Rate Hikes Are Difficult, But Necessary

If you have a mortgage, you’ve felt it; the rapid rise in the policy interest rate this year has led banks to charge higher interest rates. As a result, the interest on your debts has gone up.

And the Bank of Canada is not finished, having announced an increase in the policy rate to 4.25 per cent today. Less than a year ago, it was still at 0.25 per cent.

The reason we’re here today is that the central bank is trying to correct its past mistakes. By indicating to the federal government that it would finance its borrowing with hundreds of billions of dollars of new money, the Bank of Canada allowed the government to spend, almost with abandon, and for an extended period.

This stimulated demand, causing the high inflation (6.9 per cent) that we’re living through now.

Finally, by waiting too long to turn off the taps and raise interest rates, the central bank allowed inflation to set in and get much worse. To bring it back down to a more reasonable level, its interventions have had to be much more aggressive.

In a very real sense, we’re all paying for the Bank of Canada’s mistakes.

And as unpleasant as the remedy is—and it’s important to recognize it—the alternative of allowing inflation to continue unchecked would have been much worse.

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