Financial Pain Caused by Higher Interest Rates
June 25, 2023
Bank of Canada interest rate increase will be painful, writes Peter Watson.
It was a surprise the BOC increased interest rates again.
The BOC has a delicate balancing act. One consideration is controlling excesses inflation and that is done by increasing interest rates.
The second consideration is to try not to put the brakes on the economy too hard and cause an economic tailspin.
The human side of managing the Canadian economy is the story with this latest increase in interest rates. For a long time, interest rates were at historic low levels.
It was meant to encourage consumers to spend and that they did. Household debt increased and is higher in Canada than in many other countries.
Now what is best for the economy is to stop spending. Thus, the increase in interest rates. Aggressive interest rates started last year.
Unfortunately, many households are now struggling with mortgage payments and other types of loans. At some point some of these people will not be able to stay afloat with higher interest rates.
We are entering a period of severe consequences for many. When you cannot afford to make mortgage payments, essential spending like food can be paid by credit card.
When credit card balances cannot be paid, an exorbitant interest rate kick in. The downward financial cycle just keeps spinning faster and faster.
The BOC ripped the band aid off Canadians. This will hurt now but things will be better with inflation and our economy later.
The economy will get better. It always has.
The concern is many people will have serious financial difficulties with significantly higher interest rates.
The concern is higher interest rates will be painful for many.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com
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