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Rate Increase On the Rise

February 24, 2021 | Posted by: Dallas Martin

Rate Increase On the Rise

A few weeks ago, in the run-up to the Bank of Canada’s last interest rate setting, market watchers were abuzz with the prospect of another drop – even if it was just a so-called, micro-cut of 0.1% to 0.15%.

That didn’t happen.  The Bank held steady at 0.25%.  Now, the chatter has turned to the possibility of an impending rate hike.

Part of the logic for this centers on the savings Canadians have accumulated during all the pandemic lockdowns.  By some accounts, $90-billion is bottled up in bank accounts across the country. 

The theory is when the lockdowns and restrictions end Canadians will go on a spending spree, pouring that banked money into the economy.  Demand for goods and services will outpace the ability to provide them, causing price increases that will push inflation above the BoC’s 2.0% target rate.  The Bank will then step in with rate increases to temper spending and calm inflation.

However, a number of economic observers make the point that a flash flood of spending is unlikely.  They say the persistence of the coronavirus and the cumbersome rollout of the vaccines will slow the lifting of current lockdown regimes, and that alone will be a moderating influence on spending.

January job numbers, showing 213,000 losses, also indicate there is still underlying slack in the economy.

Further, the central bank has said inflation will have to be sustained at more than 2% before it steps in.  A sudden rise in “post-pandemic” spending will, most likely, be a pop, not a plateau.

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