Editorial: Don’t rush to cut interest rates
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The Bank of Canada should be far less eager to give the public what it wants – namely, a cut to interest rates to provide relief to borrowers.
There is some debate as to when the central bank will pull the trigger: Some observers say a June cut is likely, but not a “slam dunk.” Meanwhile, reporting by the Financial Post claims capital markets have already priced in a rate cut by July.
And in response to a reporter’s question last week, Governor Tiff Macklem acknowledged a June cut was possible. More revealing, he said the bank was waiting to see if slowing inflation indicators were a trend, rather than a blip in the data.
In other words, it’s not a matter of if, but when. Yet what’s missing in this story is a cogent argument for why lowering rates is, in the long run, a good idea.
Mortgage holders have either seen, or will come to see, greater servicing costs as a result of interest rates that have risen since the coronavirus pandemic. The squeeze at this end has piled on other examples of the rising cost of living. But lowering interest rates across the board is a blunt instrument that will have side effects, even if it gives relief to households.
The price of borrowing money is a balance between creditors and debtors. Interest forms part of the creditor’s return on investment – ensuring money will continue to be lent despite the risk.
For more than a decade, we got used to artificially low borrowing costs – a push in favour of borrowers and against savers. While cheap debt may have helped to pad economic indicators, it has in the long run formed a disincentive to investment – the true cornerstone of economic growth.
If anything, the central bank should be using the uncertainty of the post-pandemic era as a chance to restore the balance. This means the governor should be holding rates as they are, instead of trying to drop them as soon as he defensibly can.
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