‹ Back

Navigating the Bank of Canada's Quarter Basis Point Increase: Unaffordability, Quantitative Easing, and Economic Solutions for Ottawa

 

Author: Kal (Khaled) Hawari

 

In July 2023, the Bank of Canada made a significant quarter basis point increase, raising the interest rate to 5%. This decision has triggered concerns about unaffordability and generated economic challenges in various Canadian cities, including Ottawa. In this comprehensive article, we will explore the implications of the increase, discuss the concept of unaffordability, analyze the decision-making process behind interest rate changes, delve into the measures of quantitative easing (QE), evaluate the impact of QE on Ottawa at micro and macroeconomic levels, and address the Ontario liquidity crisis. Additionally, we will examine how Vancouver and Calgary's economies impact Ottawa and discuss the effects of the COVID-19 pandemic on the aforementioned issues.

 

 

 

 

 

Understanding the Quarter Basis Point Increase

 

The Bank of Canada's decision to increase the interest rate by a quarter basis point reflects its commitment to managing inflationary pressures and maintaining economic stability. However, this increase directly affects individuals and businesses, posing significant challenges in terms of affordability. Higher interest rates translate into increased borrowing costs, including mortgage rates, making it harder for people to afford homes and businesses to secure loans.

 

Unaffordability: A Growing Concern

 

Unaffordability has become a pressing issue in many Canadian cities, including Ottawa. The combination of rising housing prices, stagnant wage growth, and increased interest rates has created substantial challenges for individuals and families. Many Canadians find themselves struggling to meet basic needs, achieve financial security, or pursue their long-term goals. The consequences of unaffordability extend beyond housing, affecting various aspects of daily life and the overall economy.

 

The Impact of Quantitative Easing on Ottawa

 

Quantitative easing has several microeconomic impacts on Ottawa:

 

Lower Interest Rates: The primary goal of QE is to lower interest rates, making borrowing more affordable for individuals and businesses in Ottawa. This can stimulate consumption, investment, and economic activity. Lower interest rates reduce the cost of mortgages and other loans, making it easier for individuals to purchase homes and for businesses to invest in expansion and job creation.

 

Asset Prices: QE can influence the prices of various financial assets, including real estate. Increased demand resulting from central bank purchases can drive up real estate prices in Ottawa. While this can benefit homeowners and investors, it can also raise concerns about affordability and income inequality. The rise in asset prices may create challenges for first-time homebuyers and individuals seeking affordable housing options.

 

Access to Credit: QE measures can improve access to credit for individuals and businesses in Ottawa. By injecting liquidity into the financial system, QE enhances the availability of funds for lending purposes, promoting investment and economic growth. This increased access to credit can support small and medium-sized enterprises (SMEs), allowing them to expand operations, create jobs, and contribute to the local economy.

 

Quantitative easing also has macroeconomic impacts on Ottawa:

 

Economic Stimulus: QE provides economic stimulus by increasing lending and investment, which can stimulate Ottawa's economy and support job creation. By injecting liquidity into the financial system, QE measures aim to boost consumption, foster business expansion, and drive overall economic growth. This economic stimulus can have a positive effect on employment rates and household income levels in Ottawa.

 

Financial Stability: QE measures can contribute to financial stability by mitigating systemic risks and supporting the functioning of financial markets. By providing liquidity and reducing the likelihood of liquidity crises, central banks help maintain stability in Ottawa's financial sector. This stability encourages business confidence, investment, and economic growth.

 

Inflation Management: Central banks closely monitor inflation expectations and adjust QE programs accordingly to maintain price stability. Ottawa can benefit from the Bank of Canada's vigilant approach to managing inflation, ensuring that prices remain stable and purchasing power is preserved. Price stability is crucial for maintaining the cost of living and promoting a healthy business environment in Ottawa.

 

The Ontario Liquidity Crisis and its Impact

 

The Ontario liquidity crisis refers to the challenge of managing liquidity and financial stability in the province of Ontario. This issue existed before the COVID-19 pandemic, driven by factors such as high levels of government debt, fiscal challenges, and regional economic dynamics. However, the pandemic exacerbated these challenges, as lockdown measures and economic disruptions put additional strain on businesses, households, and government finances.

 

The Ontario liquidity crisis has ripple effects on Ottawa's economy. As the capital city of Ontario, Ottawa is intricately connected to the province's economic health. The crisis can affect government spending, infrastructure projects, and business investments in Ottawa, leading to reduced economic activity and potential job losses. Moreover, the strain on businesses and households in Ontario may impact consumer confidence and spending patterns, affecting Ottawa's retail and service sectors.

 

The Impact of Vancouver and Calgary Economies on Ottawa

 

The economies of Vancouver and Calgary play a significant role in Ottawa's economic landscape. Vancouver, a major metropolitan city with a diverse economy, is known for its real estate market and strong ties to international trade and investment. Changes in Vancouver's economy, including shifts in housing prices, foreign investment patterns, and trade relationships, can indirectly influence Ottawa's economy through national economic interconnectedness.

 

Similarly, Calgary, a major hub for Canada's energy sector, impacts Ottawa's economy through the oil and gas industry's performance and related investment activities. Changes in oil prices, production levels, and energy sector investments can have implications for Ottawa's economy, particularly in sectors such as transportation, manufacturing, and professional services.

 

The Impact of COVID-19 on Ottawa's Economic Landscape

 

The COVID-19 pandemic has had far-reaching effects on Ottawa's economy. The implementation of public health measures, including lockdowns and travel restrictions, disrupted various sectors, such as tourism, hospitality, retail, and entertainment. These disruptions led to job losses, reduced consumer spending, and financial strain on businesses.

 

Furthermore, the pandemic accelerated the shift towards remote work and digital transformation, impacting the demand for commercial real estate and office spaces in Ottawa. The resilience and adaptation of businesses to remote work practices became crucial for their survival and growth during these challenging times.

However, the pandemic also presented opportunities for Ottawa's technology sector, which experienced increased demand for digital services, telecommunication infrastructure, and cybersecurity solutions. Ottawa's reputation as a technology and innovation hub enabled the city to capitalize on these opportunities and attract investment in sectors such as digital health, e-commerce, and remote collaboration tools.

 

Conclusion

 

The Bank of Canada's quarter basis point increase in July 2023 has triggered concerns about unaffordability and generated economic challenges in various Canadian cities, including Ottawa. By implementing comprehensive solutions that address unaffordability, promoting economic diversification, supporting skill development and training, empowering SMEs, fostering collaboration, and leveraging the benefits of quantitative easing, Ottawa can navigate these challenges. Additionally, understanding the impact of the Ontario liquidity crisis, the economies of Vancouver and Calgary, and the effects of the COVID-19 pandemic is crucial in developing effective strategies to promote economic resilience and ensure the well-being of Ottawa's residents and businesses. Through targeted and coordinated efforts, Ottawa can build a more affordable, sustainable, and prosperous future for all.

 

******************************************************************************************************************************************************************

Khaled Hawari is based out of Canada, Ottawa, and is well-versed in finance, accounting, and fintech. With many years of experience in studying DeFi, and traditional blue chip investments, as well as graduating top of his class in undergrad, this article is a combination of personal opinion and research. From time to time, inspiration kicks in, and a drastically different topic of interest will be discussed and shared here!

 

You can find the socials here:

 

https://www.facebook.com/KalHawari/
https://twitter.com/khaledhawari92
https://www.instagram.com/kalhh992/
https://www.linkedin.com/in/kalh/

***************************************************************************************************************************************************************