Thursday, May 25, 2006

You wouldn't think the world would hinge on a .25% change in either direction...

It was hard not to notice today's news that the Bank of Canada has hiked interest rates yet again, to 4.25%, but seems to be leaning towards slowing the frequency of hikes for the next little while.

The rates themselves, I can just about get my noggin around. It's what their effect on things like employment, inflation, and (by extension) the stock market is that's a little more muddled.

As far as I can tell, the basic rule is that when rates go up, it encourages people to save to take advantage of the low rates. It also means people are less willing to spend money they don't have on consumer goods and big ticket items. That slows inflation because less money is available in the national pool, which makes every dollar worth more. So, in a nutshell if rates are up, inflation goes down.

I suspect that the people who fret the most about rising rates are the ones who probably couldn't afford to buy that house/car/vacation to begin with, but were sucked in by the low lending rates, and are now worried about having to pay the piper. And as a general rule, high rates are great if you've got money, but not so hot if you owe large quantities of it.

Since I have no major long term debt and some cash in savings, my simplistic analysis suggests that the higher interest rates go, the better it is for me. But as with most things like this, I doubt it's that simple. Yet another hit to the manufacturing sector can't be good for the stock market, but if the rate hike makes it harder to keep up mortgage payments, maybe starter home prices will come down so I can jump in.

As usual when I sit down to write one of these posts, my head hurts.

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