LILLEY: Trudeau punishes home owners rather than cut spending to fight inflation
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The Bank of Canada has to do something about inflation; however, it is the only tool the government is using, and it’s going to hit many like a wrecking ball.
On Wednesday, the bank announced its latest interest rate hike of 75 basis points, taking the overnight rate from 2.5% to 3.25%.
Bank officials also promised more hikes in the months to come.
At the start of the year, the rate was 0.25%, where it had been since March 2020. We’ve been through an unusually long period of low interest rates, the last time the rate was as high as it is now was in spring 2008.
According to the calculations from Lowestrates.ca, people who bought homes earlier this year at the local average price and used a variable rate mortgage could see huge increases in monthly payments as a result of this rate hike. In Toronto, they calculate the average payment increasing by $351 per month; in Vancouver, $394 per month; in Calgary, $194 per month; and in Edmonton, $146 per month.
That’s for people on variable rate mortgages. Those who have been making payments for the last several years on low fixed rate mortgages and are about to renew will see huge jumps. Homeowners are about to pay a steep price as the Bank of Canada seeks to tame inflation, but they aren’t the only ones.
Personal and business lines of credit are about to get more expensive to service, as are many credit card balances.
Interest rate hikes shouldn’t be the only tool
The Trudeau government has been warned about inflation for well over a year now and done little to act, leaving it all to the central bank. Back in June, Scotiabank called for the Trudeau Liberals to cut back on government spending to aid the bank in the inflation fight.
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“Lower government spending on goods and services could help lower inflation,” the report from Scotiabank stated.
Chrystia Freeland, Trudeau’s finance minister and deputy prime minister, dismissed that idea at the time, saying that they had already done their part by ending COVID support measures. It’s true those COVID measures ended, but government spending is still up from $317 billion in total expenses in the 2016 budget to $428 billion in the 2022 budget.
That’s a massive $111-billion increase.
Even accounting for inflation, in constant 2022 dollars, spending is up by $52 billion after the government says it has tightened its belt and ended COVID relief programs. Increasing spending by 14% in constant 2022 dollars will lead to inflation — it is bound to happen — and everyone can see that except the Trudeau government.
For the last several months, the Trudeau government has tried to place all the blame for inflation on outside forces. Supply chain disruptions due to COVID-19 and Russia’s invasion of Ukraine are the most cited sources, and while there is some truth to that, it’s not the whole story.
Government spending has been a part of the growth of inflation, domestic and international factors are at play, and anyone saying it’s just one of these factors while denying the other isn’t telling you the truth. Now comes a worrying report from TD Economics.
In a note to clients regarding the Bank of Canada’s interest rate hike, TD’s chief economist Beata Caranci and senior economist James Orlando state that domestic factors are becoming the “main influencer” in the inflation situation in Canada.
What’s worse is that inflation is now hitting the service sector as opposed to just the goods sector, and that will keep inflation running high for some time.
Freeland was asked what her government would do about inflation and if the central bank raising interest rates was the best idea at this time, but she offered little more than platitudes. The message from the Trudeau government: ride it out.
This is what you get when you elect a prime minister who doesn’t think about monetary policy.
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