Why does Canada need to hoist interest rates?

It’s a move deliberately designed to take money out of consumers’ pockets and slow the Canadian economy. That means slower job growth and less consumer spending. So why do it? The rationale behind the Bank of Canada’s rate hikes is that higher interest rates will slow the rate of growth in the country’s economy and keep inflation in check at about two per cent, says Matthew Stewart, director of national forecasting with the Conference Board of Canada. “The inflation rate is now below two per cent but it is rapidly approaching it,” said Stewart in an interview. “Most economists believe it’s best to keep the inflation rate at two per cent. There’s a lot more value in the economy being predictable than in the few jobs you might pick up.” When the Bank of Canada raises its rates, the chartered banks follow suit and variable rate mortgages, lines of credit and personal loans all cost consumers more. That’s bad news to those who are carrying heavy debt loads, especially if they lose their jobs or suddenly face unexpected expenses. But the economic growth and tight labour market that prompted the Bank of Canada to raise its rate also means those Canadians who have jobs can soon expect to see something that’s been absent for years. Good pay raises. “Because of the tightening job market, we’re going to see wage increases and this is going to help a bit,” said Stewart. “We’ve seen such horrible wage increases … It’s been lower than the inflation rate for the last two years.” In 2017, the inflation rate came in at 1.5 per cent, exactly the same amount as the average pay hike. That means the average Canadian who got a raise last year finished off the year no further ahead financially. In this region, though, raises are not expected to be as high as in the rest of the country, said Stewart. “Atlantic Canada is suffering from an older labour force and slower labour force growth,” he said. “Most of the growth is happening in Ontario and there is a recovery underway in Alberta.”