The recent news surrounding Scotiabank is a sign of the economic toll being felt across Canada. Scotiabank is being pulled in two directions - over-exposed to LATAM and under-exposed to attracting deposits compared to loans - causing their interest margins to suffer. On top of this, they have had to book provisions of $638 million, up from $222 million a year ago, due to increased odds of loan defaults in a rising interest rate environment.
It’s easy for us to forget that there are many people across Canada who have struggled since the financial crisis of 2008 and haven’t seen wages increase tied with inflation or been able to make ends meet living at below poverty levels while working full time. Unfortunately, this situation has only worsened as fuel prices remain high and wages remain low despite global shutdowns due to Covid-19.
The Bank of Canada (BoC) has been struggling with how best manage the economy during these times when most people are locked into their debt and won’t be affected by rate hikes. BoC needs maintain price stability while also trying not diverge too much from Fed rates; if they do Canadian exports will look cheaper on the world scale but imported goods would be more expensive causing further inflationary pressure on Canadians’ affordability levels.
It’s no surprise that we are now seeing an environment where good news is actually bad news as it prohibits BoC from lowering rates any further which could benefit those who are struggling financially right now. We can only hope that the federal government takes steps towards real wealth creation instead of just focusing on providing safety nets which will ultimately leave them worse off than before when it comes time for repayment down the road.
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Author Eliza Ng