Will Disinflation Move the BOC to Hike Rates?

With bond yields lying low and the US putting an end to their QE programme, it may be the time for the Bank of Canada to give its rate hike bias the kick. With the entire economy at stake, something will have to change.

What is Inflation?

Inflation is the rise in the level of goods, products and services – this means access to financing is harder to get and purchasing power drops. While no one wants inflation, it’s natural that markets expand and contract over time. With a high inflation rate the CPI rises; it’s important to note that CPI doesn’t include the cost of food, fuel and other important goods, so it’s not always a great indicator of how an economy is doing. One of the worst side effects of inflation is “uncertainty” – if people aren’t sure that their money or investments are going to hold value, they’ll avoid using it.

What is Disinflation?

Disinflation is where Canada has been for the last 2 years. It’s a slowdown in the rate of inflation – the cost of goods, products and services don’t rise over time. This usually only happens during a recession when people aren’t buying things, but it can happen in other circumstances when interest rates are kept low like they have been in Canada. If the amount of money available in a country contracts (like a central bank selling securities or carrying out tight monetary control policies) disinflation can happen.

What is CPI?

CPI is a measurement used by economists; it measures changes in price in regularly purchased consumer goods – but it does not include the cost of groceries or energy like utilities and fuel. They’ll pit information collected about how much people are earning against the cost of a TV, men’s shirts and other items that people have to purchase as part of a household. It’s meant to analyze how much income weights against the ability to maintain a certain standard of living. Different countries use CPI in different ways.

Why is a 2% Inflation Rate Bad?

It depends on who you ask. A Toronto mortgage broker may want to keep rates low as long as possible, while a manager of a savings and loan will want to see interest rates rise so he can offer better returns to his customers.

If interest rates remain low, there is no incentive to save. If there’s no incentive to save, the money supply expands, and the inflation rate goes up. With so many American companies setting up shop in Canada it’s important to keep the Loony competitive – it needs the same purchasing power as the dollar if not more. While low interest rates are great for the short term, eventually they’ll have to rise.

Homebase Mortgages is a leading Toronto mortgage brokerage, which specializes in all types of mortgages including second mortgages, private mortgages, mortgage refinancing, mortgage renewals and home equity loans and lines of credit. To learn more about mortgage options that are right for you, please visit them at: http://www.homebasemortgages.ca/

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