Chapter 6

http://www.cbc.ca/news/background/economy/

When it comes to interest rates, what goes up, must come down, and then up again. In mid-2006, the Bank of Canada has raised the interest rates nine times, up to 4.25%, after it hit 40 year lows in 2004. In the same manner, the US Federal Reserve raised their rates 17 times for the rate to reach 5.25% now. After both sides took some breaks, stating that economic growth seems to be moderating, there are now renewed talks on the Bank of Canada raising interest rates again. This means that the economy and of course, inflation is increasing faster than expected. However, the US may have to cut their rates to keep their economy running smoothly. It would be unusual for the Canadian and US rates to move in opposite directions because both the economies are closely related. However, it could happen because the Canadian economy does not follow the Americans completely.

So what does increasing interest rates mean? It means controlling inflation in the Canadian economy. Since the economy is booming so quickly, and future forecast shows that it will continue to boom (2010 Olympics), inflation will cause prices to rise and put stress on citizens. So, to control such an event, the Bank of Canada can increase their interest rates to change the money supply. This monetary policy will make it cost more for businesses to borrow money from the bank and cause them to invest less. In the same manner, households are encouraged to save money. When they save money in the bank, their returns will be higher; so when they save more, they will buy less, and inflation is controlled. However, everything is not as simple as it seems. Although increasing rates will control inflation, there might be a contradiction in savings called the paradox of thrift. If enough people increase their savings, the level of spending in the economy will fall. If this falls enough, then there will be less income and people’s ability to save their income would decline. This would mean their savings would decline. So, if they save too much, they might end up having less to save. So, in the end the Bank of Canada has a very tough job to do in order to maintain and steady growth of the economy and controlling inflation to keep us, the consumers and businesses happy.

High school is ending for me and post secondary is around the corner. So, if the Bank of Canada decides to increase interest rates, this will have a huge impact on me. Costs such as student loans and other related expenses would increase, making it even harder to get a decent education and managing money. However, that is just the way the economy goes and if inflation is not controlled, prices would still increase anyways, making other expenditures costly. One positive side for me is that I can put more money into savings and hopefully attain more from the higher interest return. So, whether inflation increases or decreases, we will just have to deal with it and save up when interest rates are high. But, don’t save too much because, strangely, if you do, you might end up with less.