Fifteen months into this harrowing tightening cycle, Canada's real (inflation-adjusted) policy rate is "unequivocally in positive territory." That was BMO Economics' assessment after last week's BoC hike.
Real rates are hard for most to wrap their heads around, but they matter. For one thing, when interest rates are meaningfully above inflation, savers enjoy rising purchasing power. In other words, people's returns outpace price level increases. That creates an incentive to save instead of spend.
At the same time, businesses are less inclined to invest in things like buildings and equipment—because interest expense is so high relative to their revenue potential.
With the BoC tightening the noose on borrowers again, "real rates" are even more positive. This phenomenon is slowing our economy more and more, getting us closer and closer to the disinflation we seek. To quote Axl Rose once again, all we need is just a little patience.
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