The Bank of Canada explained why it is raising interest rates and how this is fighting inflation

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In case you haven’t noticed, the Bank of Canada has been raising interest rates in recent months to ease inflation.

But how exactly does that work?

Well, the Bank of Canada (BOC) recently released one thread on twitter Breakdown of how his strategy of raising interest rates can help bring down inflation.

The BOC mentions that inflation is warming due to many factors. Not least the invasion of Ukraine by Russia, rising fuel costs and problems in the global supply chain.

But another factor is that the economy is “overheating”.

“#COVID19 restrictions are lifted + people want to get back to normal = shortage of labor and goods,” the bank said. “Prices tend to rise when demand for goods and services is greater than demand [economy] can deliver.”

This is partly why we are currently witnessing the 7.7% inflation rate last reported for June.

The Bank of Canada raised interest rates to cool the overheated market.

“An increase in #interest rates causes people and businesses to: 1. stop or slow spending, 2. borrow less so they buy less,” the currency organization continued.

“Reduced demand will bring the economy back into balance and curb inflation,” it said.

And with that, the Bank of Canada is saying it will “get inflation back on track [their] 2% target.”

However, this strategy has not eased the financial anxiety of some Canadians.

A recent study found that one in four Canadian homeowners could be forced to sell their home if interest rates continued to rise.

In addition, some experts believe that continued interest rate hikes to fight inflation will trigger a recession, as nearly every other attempt has done.

And with at least three more hikes forecast, it seems that at least the cost of things like mortgages and other large loans could remain high for the remainder of the year.

The cover image of this article was used for illustration purposes only.

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