Chapter 6 (The Best Interest)
Bank of Canada seen holding steady on interest rates
As Canadian economy strengthens, the Bank of Canada has made a tough decision to not change the current interest rate of 4.25 per cent. After six rate decisions since May 24, 2006, the interest rate has only been raised by one-quarter of a percentage point. One of the core reasons why the Bank of Canada has not budge on this overnight rate for loans is because of inflation. The risk of high inflation is not sufficient enough to increase the interest rates to balance the economic setting. The current inflation rate stands at 2.2 percent and the economy has grown at an annual rate of 3.5 percent since December.
Based upon the current economic position of Canada, I think Bank of Canada should have increase interest rates. The Consumer Price Index grew sufficiently corresponding to the upswing in the value of Canadian Dollar. Inflation will persist to increase higher than the inflation target. Prices on food and gas have already risen exponentially in the last year. The Canadian Dollar is above the range of 8.5 – 9.0 cents where Canada is operating at its production capacity against the robust American economy. Thus there is a push of demand and prices for Canadian commodities. As a result, the Canadian economy will continue to grow pushing the inflation rate above expectations. The Bank of Canada must implement a constraint on the future inflation increase referring to the monetary policy. The Canadian economy needs a cool-down to combat inflation rates and hence, the best strategy is raising interest rates. This will encourage Canadians to save and chartered banks not to lend reducing the money supply. The Bank of Canada easily manages this future forecast of higher inflation and vast money supply by adjusting the interest rate by a few quarter of a percent. Although this adjustment will affect rates for mortgages and the demand on loans and credit, it may attract investments and continue to strengthen the Canadian currency. Canada is overdue for another boost in interest rates to curb the inflation rates.
Currently, I am seeking financial aid through various student loans as well as acquiring a bank loan for a car. If Bank of Canada hikes the interest rates to balance the Canadian economic growth, I will struggle to attain the finance for my new expenditures. The current interest for student loans in BC is a floating rate of prime plus 2.5 per cent or a fixed rate of prim with additional 5 per cent. Although I do not have to begin repayment until graduation, it would still be quite costly to repay as the interest rates increases in Canada. To maintain an economic balance, a higher interest rate will prevent inflation and stimulate to save. Overall, I will be content as long as the Bank of Canada continues to monitor the Canadian economic growth and be diligent in preventing a market meltdown.
If you grow, take a hike