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.