Higher interest rates are doing something many thought impossible—it slowed Canadian borrowing. Bank of Canada (BoC) data shows the M2++ growth slowed further in February. The M2++ is a broad measure of the country’s money supply, closely linked with demand. The latest numbers show annual growth hasn’t been this low in at least four decades.
Canada’s M2++ Broad Money Supply
Canada’s M2++ is a broad measure of the money supply, including most of what we consider money. It includes anything you can spend, such as cash and chequable deposits, as well things that can be liquidated quickly, such as savings bonds and non-money market mutual funds. The goal with the M2++ is to capture anything considered “near money.”
Despite rarely coming up outside of finance circles, it’s an important indicator. BoC researchers found it has a close relationship with inflation, leading it by 1-2 years. They found the rapid expansion of the money supply is followed by rising inflation. Makes sense, since rapid credit expansions tend to create inefficient capital allocation, right?
Canada’s Money Supply Growth Grinds To A Halt
Rapid expansion isn’t the problem observed right now, though. The country’s money supply showed annual growth of just 2.5% in February. That’s nearly 7 points lower than the same month last year, and unusually slow. How unusual?
Canada’s Broad Money Supply Is Expanding At The Slowest Rate In Decades
The annual percent change of Canada’s M2++ money supply.
Source: Bank of Canada; Better Dwelling.
Canada hasn’t seen its M2++ expand at such a slow rate in at least 40 years. It just isn’t the level of growth expected in an advanced economy, never mind one with a booming population. At the same time, it’s following one of the most rapid accelerations in growth the country has ever seen. Nearly 1 in 5 dollars were created within the two years after 2020’s rate cuts. There’s certainly not a shortage of cheap money.
The silver lining here is that inflation will likely temper in the not-so-distant future. Such a sharp slowdown may even cause the BoC to become worried about deflation. However, premature deflation concerns are what produced the current inflation crisis—so maybe they’ll be a little more tolerant this time around.
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How it helps?
I hope they stay put and not increase interest rates now.
Please BOC and Cad Gov, stop fiddling with the dials.
What the article doesn’t say is that as higher rates cut money supply, companies will cut the number of workers so that the unemployment rate rises. This means that a) the working class will be poorer and spend less, and b) be forced to accept lower wages going forward.
Fighting inflation by these neoliberal capitalists is on the backs of the working class.
But! They are in trouble because the immireration imposed on the working class means the class war is sharpened. Look for growing strength in union organizing and greater worker militancy.
The split in the ruling class is widening as various factions lose ‘bi-partisanship’ and their intra-class struggle widens. The attempted coup in the US–the centre of world capitalism–is one reflection of this. At the international level, globalization turning into its opposite is another reflection of the capitalist elite intensifying their internal struggle.
Here be dragons.
BOC staffer’s are now patting themselves on the back looking at that M2 growth chart.
It’s very reflective of just how bad inflation in Canada has been over the last 12 months versus the last 40 years – for the Central Bank policymakers to reduce broad money supply (M2) by this incredible amount – inflation has been real bad.
Remember; to reduce inflation this is really their only tool – so far (for them) this is a sign of a job well done. But know that these folks are threading a needle here, deflation must be avoided – and the tools they have to create a soft landing are mired by high debt levels -both public & private.
This could easily lead to a sovereign debt crisis.
For Canadians, brace for recession impact & more pain to come; regardless of how successful policymakers are.