Worried that Canadians didn’t get another interest rate hike yesterday? Don’t be. Bank of Canada (BoC) numbers show the M1+, a broad measure of “cash,” continues to see tapering growth. That might not mean a lot to most people, but it may be signalling that households are still feeling the impact of the previous interest rate hikes. It sounds complicated, but we’ll explain it with as little technical language as possible.

The M1+ Is An Important Measure of Money

The M1+ is one of the measurements of monetary aggregates, this one being the most liquid form of money. The BoC counts the currency outside of banks, plus chequable deposits held at chartered banks, trust and mortgage loan companies, and credit unions. Basically, it’s the most readily available forms of cash. The extremely important indicator is rarely discussed outside of the BoC.

This measure is essential to the BoC for managing the rate of money growth “indirectly.” When interest rates increase, people borrow less and use more money to service debt. The result is less “cash” floating around, which is reflected in the growth of M1+. Slowing growth is almost always a sign of declining economic growth. The impact is more immediate in industries that use large amounts of financing, like home or car sales. Starting to see why the Consumer Price Index (CPI) isn’t the only reason the BoC moves interest rates? Great, let’s see how slow the growth is these days.

Lowest Growth Since December 2003

The growth of M1+ continues to rapidly taper, according to the BoC. The rate of growth fell to 5.6% in April, the lowest it’s been since December 2003. For a little context, that growth is 49.09% lower than the same month last year, when it was 11%. Since November 2017, we’ve fallen below the median rate of 7.85%. This is still an expansion of the supply, but way slower than we’ve seen in recent history.

Canadian M1+

Percent change in M1+, showing declining economic activity.

Source: Bank of Canada, Better Dwelling.

If you’re wondering why the BoC didn’t hike interest rates yesterday, it’s because they didn’t need to. Households are still adjusting to the previous hikes, even though we’re just off record low interest rates. Despite relatively low debt service levels the government claims, we’re seeing a small hike remove a lot of growth of M1+. Less cash is floating around, as households devote more money to servicing their existing debt.

The rising cost of debt servicing will be a drag on economic growth. As we can see, there’s little urgency to drag economic growth even further. We’re already seeing it happen, we just need to sit back and wait for the government to announce it.

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