Interest Rates and Inflation: A Conversation with the CEO of Access Credit Union – SteinbachOnline.com

This year, we've seen a remarkable shift in the Canadian economic landscape. Inflation rates, which rose 5.1% to 6.7% in 2022 alone, have dropped significantly, reaching 2.5% last July. To understand what this means and the impact it has on southern Manitoba residents, we spoke to Larry Davey – the president and CEO of Access Credit Union – and got his expert opinion.

Provide context

To provide a baseline, Davey gave a brief explanation of inflation and what the number itself means. “That number takes into account many areas of the economy, but what it really means is that prices overall have increased by about two and a half percent over the past year… If the Bank of Canada wants to move our economy forward, they try to keep the inflation rate between two and three percent.”

Driving factors

Davey went on to explain why inflation has been so high and what economic forces have been at play in recent years. “When we went through the COVID situation, there was a surplus of money because people… had saved a lot of money and at the same time some products couldn't be delivered… Demand picked up… People wanted more and more products, and with less product available, that drove up prices.” According to Davey, supply chain disruptions caused by the pandemic increased consumer demand, which led to rising prices, which was reflected in the inflation number at the time.

Interest rates

The Bank of Canada has taken action to combat rising inflation by adjusting interest rates. Davey explains: “As a result, we have seen rising inflation. To delay that rise, the bank is raising interest rates. By raising interest rates, people then have to think about what's happening with their mortgage… with their care payments… And that reduces the burden on the economy.”

Davey explained that by making loans more expensive through higher interest rates, the Bank of Canada cooled consumer spending and created a domino effect. Reduced consumer spending gives suppliers the opportunity to restock their inventories. This increase in supply helps stabilize or even lower prices over time, which is reflected in falling inflation.

As inflation has eased, there is speculation about the future of interest rates. Davey provided us with some perspective, but pointed out that predicting anything with certainty is difficult at best. “Over the last few months, interest rates have been falling. The Bank of Canada rate has fallen by about half a percent. The expectation is that we will see another decline in interest rates of about half a percent over the next four months, and another decline of one to one and a half percent is expected for next year.”

Housing market advice

For anyone considering buying a home in the near future, Davey has some practical advice: “If you really want to buy something now, I would recommend a shorter term or a variable term that you can set at a later date… I don’t think you’ll see a big drop in the value of individual homes… The market will slow down as people aren’t rushing into business, but [rather] wait until interest rates fall.”

Looking further ahead, Davey maintains a realistic outlook on the future of interest rates, saying the days of 1.9% five-year rates when COVID hit are unlikely to return. “I think what you're probably going to see at the end of the day is five-year mortgage rates of about four percent to maybe a little below four percent in the next year or two.”

Diploma

It can be difficult to understand the balance between inflation, interest rates and economic stability. But whether you're considering buying a home or planning to manage your existing finances, staying informed about the current situation can help you build confidence in your personal financial decisions.