The Bank of Canada desires to let people know that rising interest rates would suck, but ultimately it would make life more cost-effective. This week, the Bank of Canada (BoC) had published a Twitter thread on why higher interest rates would make life more cost-effective. They had explained the impact on commodities but assumed the reader had some basic knowledge about the way interest rates work. Since some individuals won't have this basic knowledge, we would have thought that we would break down how the higher interest rates would ultimately improve the cost of living.

HIGHLIGHTS
BoC has explained why higher interest rates would make life more affordable
Central bank’s main job was to manage inflation that means the value of money
The primary tool that was used to control the inflation was interest rates

The main mandate of the central bank was to manage inflation

The central bank’s main job was to manage inflation that ultimately means the value of money. They would try to do this by keeping it at level that they would believe was low enough to not over-dig the money but had been high enough to prevent “hoarding”. It was a balance between not eroding the value of your work, but even at a rate that an individual would continue to spend and invest. The current target inflation was 2 percent, with a tolerance of one point above or below.

The primary tool for controlling inflation was interest rates

The primary tool that they would use to carry out this task was interest rates. In Canada, the overnight rate was especially vital and affects the cost of most short-term borrowing. Once the inflation has been too low, they would lower the interest rates to make debt cheap and encourage borrowing. Usually, when an individual would borrow something, they would buy something. After all, how not splurge on this house when the borrowing prices are has been so low? An individual must have planned to shop something later, but with cheap debt, recently it was the ideal time.

Well, by stimulating the demand central bank would increase competition for commodities and the value of those commodities. In order to put it blunt, the goal must be to stimulate demand beyond supply to make a shortage of products and boost inflation. This whole concept usually works as a result of which the credit was always granted quicker than supply chains would respond to increased demand.

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