Borrowers love it when the Bank of Canada cuts interest rates, savers do not; but the decision taken periodically by the central bank brings several factors into play which create a delicate balancing act.
This week the BoC’s deputy governor Paul Beaudry has been explaining how vulnerabilities affect interest rate decisions and how a change that sparks a boom now could lead to a bust down the road.
Speaking at Laval University, Mr Beaudry said that a rate decision that can help the BoC achieve its key inflation target in the short term can make it difficult for it to do so in the longer term. Inflation, he noted, was still the number one mission of monetary policy.
The bank faced such a choice in its October 2019 interest rate decision. There were calls for a cut with the global economy looking weak, which could have impacted Canada’s economy and seen inflation fall.
“We considered an interest rate cut as “insurance” to support the economy. But we also knew that lowering interest rates could spark a boom in borrowing—especially for houses—and an additional buildup of debt. And we saw that this increased debt could slow our economy and make it harder to hit our inflation target in the future. So, we decided that the short-term benefit to the economy was not worth the potential cost in the long run,” the deputy governor explained.
Watch the full presentation:
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