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- cross-posted to:
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The central bank is raising rates to fight inflation. No one else seems willing to help
The central bank is raising rates to fight inflation. No one else seems willing to help
https://www.bankofcanada.ca/core-functions/monetary-policy/
I am just going to leave this here, and if you don’t trust BoC, maybe check other literature that explains how central bank, over night rate, etc works to control the market. Cause you seems to have a misunderstanding on how this work if my apple business example above don’t work for you.
Your apple business example is fine, and if apples were driving inflation then higher interest rates would quash things pretty quickly. But we’re in a situation where it is interest costs themselves which are driving inflation. I’m not sure that has ever happened before. Certainly not in any recent memory.
As before, debt becomes more appealing when inflation is high. If we, for argument’s sake, had 100% inflation YoY, a $100,000 loan today will have a principal balance of just $50,000 (constant dollars) next year. That is one hell of a steal! As such, demand for loans increases with inflation, and the cost of acquiring loans (interest) begins to rise to find equilibrium – basic supply and demand.
The trouble we’re in is that each time the rates go higher, so too does the cost of borrowing, which in turn sees inflation go higher with borrowing costs being the thing causing inflation this time, which makes debt more appealing and able to burden higher rates – later, rinse, repeat.