Bank of Canada Governor Tiff Macklem’s declaration in July 2020, that Canada’s interest rates would remain low for a long time unleashed a wave of consumer spending that included speculative purchases in Canada’s hottest housing markets.
Macklem’s insistence that interest rates would remain historically low for years to come has backfired, causing severe financial consequences for many Canadians.
Macklem’s ill-advised advice to Canadians to spend, because interest rates will remain low, has had a detrimental impact on individuals and the economy alike. In fact, it has led to increased financial instability, soaring housing prices, and inhibited long-term economic growth. The repercussions of Macklem’s statements should not be overlooked. There are too many Canadians today who are experiencing financial hardship because of his reckless pronouncements.
By promising persistently low-interest rates, Macklem disregarded the importance of fostering a stable economic environment. The resulting excess liquidity has facilitated speculative investments and risky behavior, increasing market volatility and susceptibility to financial shocks. Household debt has risen to historic levels as individuals were lured into using lines of credit to buy second homes, investment properties, and purchasing expensive luxury vehicles. Consequently, a sudden spike in interest rates has led to a debt crisis, leaving many Canadians financially vulnerable.
Macklem’s prolonged, ultra-low interest rate position can be directly attributed to the Canadian housing market’s alarming surge. With cheap credit readily available to consumers, demand for housing skyrocketed, surpassing supply availability. This demand-supply imbalance has led to extraordinary price hikes that have deterred first-time buyers and have heightened the risk of a housing bubble. Consequently, housing affordability has declined drastically, leaving many first-time buyers believing they will never own a home, and existing homeowners wondering if they’ll be able to afford to stay in the homes they bought.
While Macklem’s low-interest rate assurances were aimed to stimulate spending and investment, they unintentionally discouraged Canadians to save money. Low-interest rates produced minimal returns on savings accounts. So, the incentive to save for retirement or unexpected emergencies fell off the radar for many working families. A lack of savings not only compromises the financial security of an individual it undermines the long-term economic prospects for Canada, overall.
Weakened Canadian Dollar
The Bank of Canada’s persistence, under Macklem’s leadership, that interest rates would remain low for a long, long time has contributed to the depreciation of the Canadian dollar. The devaluation of the Canadian dollar may provide temporary benefits to the export sector but it’s not a smart, long-term economic plan for Canada. A weaker Canadian dollar leads to increased import costs which negatively impact small business owners and consumers who pay higher prices for goods and services. Further, inflationary pressures caused by a weakened currency further erode the purchasing power of lower-income households, disproportionately.
Tiff Macklem’s insistence, in 2020, that Canada’s historically low interest rates would persist for years to come has proven to be detrimental to the Canadian economy and Canadian families alike. Economic instability, an inflated housing market, lowered personal savings, and a weakened currency are the direct consequences of Macklem’s policies.
The Bank of Canada must refocus its approach to ensure its policies foster positive economic opportunities for all Canadians.
Canadians need to insist that those put into leadership roles, such as Macklem serving as the Governor of the Bank of Canada, are competent enough to head up institutions that impact the lives of Canadians.
Elaine Allan, BA, MBA
Vancouver, BC, Canada