As a financial journalist who believes in free markets, I must speak out against increasing interest rates, which threaten our beloved Canadian financial system.
Since the 2008 crisis, Canadians have benefited from record low interest rates, which have increased borrowing and spending. However, the benchmark interest rate has been climbing steadily for months, and the Bank of Canada plans to raise it further. Current rate: 1.75 percent. Even while high interest rates sound like a good idea, I think they will damage our economy more than help it recover from inflation.
To understand what may happen, we must first examine how high interest rates influence different sections of the economy. Start with your money.
When interest rates rise, so do monthly payments for those who borrowed money to buy automobiles or houses. Thus, many Canadians may struggle to make their payments, putting their financial stability at jeopardy. Imagine a young family taking out a mortgage to buy their first home but struggling to pay as interest rates climb. They may have to sell their dream home or fail on their loan. This might lead the housing market to implode and financial institutions to face more delinquencies. When high interest rates worry individuals financially, they may spend and save less, which may hurt the economy.
High interest rates make it difficult for small and medium-sized businesses to obtain money for daily operations or expansion. These enterprises are especially exposed to borrowing price hikes due to their low profit margins. This might lead to layoffs, R&D cuts, or bankruptcy. Everyone understands that small businesses are our economy’s lifeblood, so anything that harms them hurts us all.
We must consider the banking industry’s vulnerability to high interest rates. Although banks’ profit margins may rise, fewer consumers and corporations can afford the higher rates, reducing loan demand. Banks may lose money and be unable to lend to the economy. This is occurring when our economy needs growth.
High interest rates influence more than personal and business bank accounts. It may damage Canada’s currency, reducing its global competitiveness. A strong loonie lowers import prices and attracts foreign investment, among other advantages. However, high borrowing costs raise interest rates, which lowers our currency and raises the cost of Canadian bonds. This might limit commerce and GDP growth.
You may argue that high interest rates prevent inflation and property bubbles. Not always. It may further worsen these issues. Toronto home prices and family debt have climbed significantly. A sudden reduction in property prices due to rising interest rates might cause a domino effect of defaults and foreclosures.
High interest rates may slow economic growth, weaken consumer confidence, and even cause a recession if not managed well.
The increasing interest rate trend has context. Many industrialised nations are raising interest rates, and the global economy is growing. However, Canada’s demographic situation must be considered. Since we have so much money and an ageing population, economic theory says interest rates should be lower. A price increase may send the economy into a cyclical downturn, endangering long-term growth.
This does not mean you should take any action to lower interest rates. After all, financial constraint is necessary for economic stability. The steady but continuous rise in interest rates warrants caution.
Finally, rising interest rates endanger the Canadian financial system. As a financial journalist who favours free markets, I encourage policymakers to carefully examine the effects of such hikes. Reducing inflation and asset bubbles is enticing, but we must consider the consequences.