Since the onset of the pandemic the Federal Government has understandably reacted by invoking various economic stimulus. The negative consequence of this is that we have to borrow money to pay for the stimulus and than print money to service the debt. It is widely known economic theory that when the money supply increases drastically, vendors of goods and services pick this up by increasing price levels. This is in addition to the supply chain issues that have been blamed for most of the inflation so far. When the pandemic is under better control worldwide and supply chain issues correct there will still be the reality of paying for increased debt levels throughout many countries worldwide. Therefore, core increase in inflation may not be temporary as some sources portray. In other words, inflation is occurring on two fronts stemming from supply chain issues and printing of currency. The Bank of Canada recently announced it will be scaling back its bond-buyback program that began during the onset of the pandemic. This methodology used by the BOC effectively removed some risk out of the financial markets. With this now being scaled back it is no surprise that interest rates are going to rise as we have been hearing for some time. However, we should remember that borrowers are qualified using the benchmark rate under the stress-test that is much higher than the rate under which a borrower will be making monthly mortgage payments. We need to place facts into perspective so that we avoid an over-reaction to what the future may hold. Certainly interest rates likely to rise further but it remains to be seen by how much and as noted we have cushions in place that mitigate the impact. #money #recg #financeandeconomy #canada#bank #bankofcanada #boc #commercialvaluations #markets
- Demitry Omrin