On June 5, for the first time in four years, the Bank of Canada cut the overnight interest rate, its main policy rate, bringing it down a quarter of a per cent from five per cent to 4.75 per cent.
This shouldn’t be surprising. The Bank has long justified its rate hikes as a measure to fight inflation—neoliberal economists view central bank interest rate hikes as the only real tool to reduce inflation, supply chain snarls and gas price shocks be damned.
Since the Bank began its rate-hike campaign in March 2022, Canada’s rate of economic growth, as measured by Gross Domestic Product (GDP), has basically been flat. It has not, however, dipped into negative territory. Two successive quarters of negative real GDP growth—that is, shrinking GDP—makes for a recession.
That hasn’t happened in Canada. The Bank of Canada, and everyone else, has been looking for a “soft landing,” a period of slower economic growth that doesn’t turn into an outright recession. So far, it seems like it may have actually succeeded in that goal.
It’s not all positive, though. One of the most important victims of the rate hikes has been new home construction, which just a few months ago was worse than the height of the pandemic economic shutdowns.
Today, the housing affordability crisis is top-of-mind for any serious politician. The most immediate driving force that’s preventing more homes from being built is high interest rates, which dramatically increase the carrying costs for developers who need to borrow money while they build projects. Cutting the rates will, hopefully, start to bring those projects back to life.
Initially, inflation rapidly eroded years of previous wage gains under the weight of increased prices. But in February 2023, workers started to claw their way back with hourly wages finally starting to grow faster than inflation. In the end, prices aren’t going to go back down to where they were in 2021, but higher wages can make those higher prices affordable again.
For its part, the Bank of Canada has encouraged corporations not to provide wage increases to offset inflations, making the argument that doing so will contribute to increasing inflation. This framework assumes that workers should be the ones to shoulder the burden of inflation, despite the fact that workers did not cause price increases—in fact, more inflation dollars went to corporate profits than wages during the inflationary period.
But if any of those workers hold a mortgage, they will tell you that things have not been so rosy. Interest rates, obviously, increase mortgage costs directly. They also increase rents as real estate investors also have mortgages and are generally highly leveraged, when rates go up they push their new interest costs on to tenants. With the Bank’s latest (minor) cut, hopefully those costs start to come down as well, however slowly.
For the past year, rent and mortgage costs have actually been one of the key drivers of inflation—in fact, if we remove those costs from the overall inflation numbers, then we see that inflation has already been within the Bank of Canada’s target zone for over a year.
Unfortunately though, none of this will actually reduce prices back to 2021 “pre-inflation” levels—those price increases are locked in now, and the “solution” for workers is to increase their wages to pay the higher prices.
It’s good news that the Bank of Canada has finally started cutting interest rates. Cutting rates made sense a year ago—it’s about time that the Bank has finally gotten started on it.
