Are high interest rates bad for Canadians?
Well, interest rates right now aren鈥檛 actually that high, by historic standards.
Ask your elders who bought homes in the early 1980s about their mortgage rates, and you鈥檒l be told a long and harrowing tale about interest rates well up into the double digits.
(The proper response, by the way, is to note that houses back then were going for only slightly more than two carts full of groceries and a tank of gas costs today.)
But the sharp increases in the Bank of Canada鈥檚 rates, from the pandemic lows of 0.25 per cent up to five per cent, have been a tremendous shock to many people with re-setting mortgages, not to mention business owners 鈥� large and small.
We鈥檝e had almost 20 years of low to very low interest rates. They had been moderate in the early 2000s, and then the Great Recession caused them to drop still further, and to stay low. They were just starting to creep up again slowly when the pandemic struck.
This means most people have forgotten what it鈥檚 like to live and do business in a higher interest rate environment.
But middling-high interest rates give as well as take. They鈥檙e good for cautious savers, who can park their money in bonds or term deposits.
In theory, they also bring down housing prices by making mortgages more expensive 鈥� and more indirectly, when saving is more profitable, speculative practices like land flipping are less attractive, which also helps.
Over time, businesses and mortgage borrowers do adjust. High interest rates now are meant to quash stubborn inflation. In the long run, it鈥檚 hoped that costs will stabilize or drop.
What isn鈥檛 great is sudden changes to the interest rate.
The Bank of Canada鈥檚 rate-raising spree 鈥� which is being paralleled in most developed economies, this is a worldwide problem 鈥� is a shock because of its speed.
But super-low interest rates were likely one of the main causes of the inflation we鈥檙e living through right now. It allowed for massive spending by consumers, but also for hiring sprees by many large corporations.
Low or high, interest rates have their positive and negative sides.
What鈥檚 more important than where the interest rate ultimately lands, is that it should stabilize.
If inflation stalls, and interest rates merely hold steady, that would be a win for everyone.
Stability makes it easier to plan for the future, for businesses, for investors and savers, for home buyers and home builders.
鈥� M.C.
