Interest rate hikes might harm the economy over time

Interest rate hikes might harm the economy over time

Interest rate hikes might harm the economy over time

Indicators from the Bank of Canada showed that growth in its M1+ gross monetary aggregates has shrunk to its lowest levels since October 2003, falling to 3.9% in July and representing a 60% year-over-year decline.

M1+ represents currency outside and chequable deposits (both personal and non-personal) – in essence, easily accessible cash, Better Dwelling stated in its analysis.

The slowdown in M1+ growth came in the wake of the BoC’s previous interest rate hikes. This is because more cash is used for debt servicing purposes.

“The M1+ is an important indicator, since it tells us about future production in the economy. When interest rates rise, they bring up the cost of borrowing. Consumers and businesses hold onto less cash, since the cost of servicing rises,” Better Dwelling noted.

Earlier this week, the bank decided to maintain its current overnight rate of 1.50%.

Read more: Sudden price decline comes with great danger – MPC

Back in July, veteran markets observer Don Pittis argued that economic indicators – including employment, inflation, housing starts, and economic growth number – might be pointing at the possibility that the trend of progressively higher interest rates is not yet ending.

“Except for the nasty impact on those of us with large debts, rising interest rates are a good sign for the North American economy. They are one more signal that nearly a decade of low interest rates have done their job, pulling the economy out of recession and into sustained growth,” Pittis said.

 

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