Almost everyone that I talk to who are aware of the wider macroeconomic policy and national monetary policy are saying one thing that is common. The Bank of Canada is expected to increase the interest rate and that too right after the end of this fiscal year. It is funny how all the market participants are expecting this interest rate to get hiked significantly this year. They are not wrong. The Bank of Canada has indicated multiple times in various forums that they are thinking about raising the rates and have warned market participants to not get too comfortable with the current rates.
There are reasons behind the speculation and they sound legit.
Omicron has the negative impact but not as big as the rate of inflation
One of the reasons the Bank did not raise the interest rate recently was the fear the market had about the new Covid wave. The virus impacted the economy and the province and the country shut down the market to stop the spreading of the virus. Turns out the economic impact of Omicron is small compared to the larger impact inflation is bringing into the Canadian economy.
Statistics Canada reported on Wednesday that the annual rate of inflation hit 4.8% in December. It does not sound much but that is the highest level of inflation in Canada in 30 years. The inflationary pressure at this point cannot be ignored at all. The authorities will have to decide on what their next steps are to respond to this extraordinary inflation rate.
Market participants understand this and they also are expecting the rate to increase as a response to these growing rates. I have no idea how much they would raise but the speculation in the market suggest that the rate will be increased by 75 basis points by the end of 2022 fiscal year. The first hike could come as early as March this year.
Housing market is breaking all records
The housing market is breaking all records fueled by these unprecedented low interest rates. Buyers are drowned on record debts and are enjoying the low interest rates fueled by the pandemic for the last two years. I know so many friends who are buying 2 or 3 investment properties. The record dept is putting everyone at risk and increasing vulnerability of the whole economy in Canada. This has to be addressed and everyone is expecting that the Bank would hike the rate to curb this crazy market.
I doubt the hike will be able to stop the craziness as there are other factors that impact housing market such as inventory and increased immigration. But the madness will subside for a bit with the higher interest rate.
How will the bigger crypto market impact?
If Canada is thinking to increase interest rate, all the other jurisdiction around the globe must have been thinking in the same line. I am not sure how the crypto market would react to this deflationary monetary policy. Hiking interest rate will not solve all economic problems we have right now. There are ongoing supply-chain issues and the pandemic is still impacting the bigger market. No prediction but I will be keenly watching the market move.
What do Hive people think?
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There's so much economic weirdness in the world, right now, that it's getting harder and harder to keep track of where the markets might be heading. I've read everything from banking causing the current crypto rollercoaster to USDT being a hidden timebomb that could throw everything into extreme volatility if normal markets can't stabilize.
Thanks for pointing out another metric to track when considering how to handle my investments. :)
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I know. It is scary and revealing at the same time when we start to muse how things may project in the near future.
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Why do I think that these predictions are intentional and self-fulfilling? And the omicron is just an excuse.
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That could be it. I still think that the authorities at the individual level are trying to follow the monetary policy designed by the big banks in the last century. The balancing act of playing with interest rate will not cover all the variables that are out there in the market. For example, the rise of digital assets provides alternative to these select economies. We can wait and watch.
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I’m not very versed in economics, but I’ll like to think such move should come as a last fall back option to tackle what’s happening. What I see happening here is the Canadian govt using their ‘wining’ card when the game is not even over. I mean, COVID is not even over, what will happen if the situation worsens? What will they do then? Won’t there be repercussions for fumbling with the interest rates?
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That is why the rate hike is watched by many with interest. The bank is not in a nice spot. They either have to keep the rate low and watch the housing market go crazy with unprecedented rate of inflation or increase the rate now so that they can induce some stability to the flailing economy. Let's see.
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