Interest rates

Does rising interest rates curb inflation? –

The Bank of Canada continues to try to counter rising inflation and, last week, raised its key rate again.

The year-over-year inflation rate in Canada rose from 8.1% in June to 7.6% in July, but further interest rate hikes are expected this year.

We asked Larry Davey, President and CEO of Access Credit Union, if the strategy was working.

“I would say they’re getting some of the results they were looking for. It’s a slower process than I think we’re all looking for,” he said. “We would like it to slow down and stop, and get back to what it was faster than what is going to happen. I know there have been discussions that it could take a year to two years before see inflation come down as much as we would like, and that is a very slow process.”

Davey noted that there are a number of factors at play when it comes to tempering the national inflation rate, and he says that the supply chain, wages, gasoline and prices of groceries are all part of the equation. “It’s very rare for these things to move in unison, so it takes a lot of leverage for the Bank of Canada, the main one being interest rates, but it takes a lot of trial and error for them to get the inflation rate down to what they expect.”

And that process, Davey added, requires a delicate balance between slowing the economy enough to make a difference while avoiding a recession.

“You can see if they pulled all the levers one way it would slow down the economy, and then what would happen is there would be an impact on jobs, a huge impact on housing and so they don’t want that to happen. They just want to slow it down and therefore that process takes a while to go through the economy.”

Fixed mortgages also play a part in the equation, Davey said, and are another reason the process is taking longer than expected.

“There are a lot of people who have fixed mortgages and they have had them for a year or two, and they could have three or four more years to pay off their mortgage. So not everyone is affected by an increase rates and that’s why it’s just one thing the Bank can do and doesn’t necessarily have an immediate impact on the economy,” he explained.