Many economists say the Bank of Canada’s decision this week to increase its key interest rate yet again was a mistake. But the bank is using the only tools it has. Why aren’t other policy-makers using the tools they have to fight inflation?
I have talked about this in a previous comment, but I’ll say it again. If your goal is to limit spending and borrowing, then it only works if the items in demand are not necessary for life. That is, if there is a supply crunch on housing, which there is, people cannot opt to become homeless instead of taking out loans.
If your response to this is “rent instead,” there is an abundance of data that shows how closely tied rental rates are to mortgage rates. The cost of one affects the other. As such, there is a limit to how effective interest rates are on curbing inflation. At some point, it hurts peoples’ ability to reach basic subsistence.
Economists from accredited institutions are starting to weigh in and say the same thing. This situation isn’t exactly the same as what we experienced in the 80’s and 90’s. We cannot just assume the same methods will work.