Q. Over the last 25 years, the average bank prime rate was 4.15%. Currently, we’re sitting at 3.7%, and still below the average. Where is the ceiling, at what point do we better control inflation and why?
A. The prices of household goods have exploded during the pandemic. Increases in groceries, electricity bills and gas at the pump, have caused the central bank to tighten the screw on inflation (which sits at 7.7% in Canada as of May 2022). The bank of Canada will meet another 4 times in 2022 to review its monetary policy. Many experts see its Prime Lending rate to increase by another 1.00% to 1.25%, which would bring the Prime Lending rate within the 4.70% to 4.95% range. I wouldn’t want to say that this is a ceiling, but we haven’t seen this type of Prime Rate since June 2008 when it was set at 4.75%.
In order to control Inflation, usually governments tend to use the contractionary monetary policy which is a more popular method of controlling inflation. The goal of a contractionary monetary policy is to reduce the money supply, which many Canadians benefited during the Covid19 pandemic with various relief programs, by increasing interest rates. This helps slow economic growth by making credit more expensive, which reduces consumer and business spending. Only time will tell if this policy will work!
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