Policy interest rate hikes: how will they impact my finances?

The policy interest rate is the fixed interest rate set by a financial institution for a country or group of countries. This determines how much it will cost to borrow money from a central bank.

In our case, the Bank of Canada is the one that is regulating, among other things, the country's economic activity. Once the Bank of Canada sets the policy interest rate, other financial institutions use it to set the interest rate on a variety of loans (personal, mortgages, etc.) offered to clients.

The current increase is an attempt to counteract inflation, which is rising in Canada and the United States.

The latest increases are intended to continue efforts to counter rising inflation rates affecting Canada, the United States, and the world.

Inflation is an overall increase in the average price of goods and services. When inflation is low and predictable, it means that the economy is doing well and the overall value of money is stable. Long story short, it means you have more money in your pocket.

When inflation is too high, consumers, businesses and investors lose purchasing power. This means overall economic development suffers. When this happens, the Bank of Canada will usually step in with a policy interest rate hike to try and stabilize the economy.

→ Better understand how inflation and market volatility affect your savings and investments

When the policy interest rate rises, borrowers pay more interest on their loans. As a result, households and businesses may want to find solutions to reduce their spending. Demand for goods and services is expected to decline and their prices may stabilize in the future.

Until then, here are some ways to counter the impact of rising policy interest rates and inflation on your finances:

• If you find that the price of food and gas has increased in the last year, it could be a good time to re-evaluate your projects, and priorities, and update your budget.
  → Create a simple and balanced budget in six steps
  → See our tips on how to save
  → Make a grocery budget
   

• If you’re planning to buy your first home, you might have to rethink your budget for the first few years because rising mortgage rates may change how much you can borrow.
  → Find out your borrowing capacity with a mortgage pre-approval
  → Learn more about incentives and grants for first-time home buyers
   

• If your mortgage rate expires in less than 6 months, an early renewal could be advantageous to secure a lower rate before the next increase, without penalty. For a loan coming with a longer term, you will need to take into consideration the penalty fees.
  → Learn about the difference between a fixed and variable rate
   

• If you have a variable-rate mortgage, your monthly mortgage payments will increase. Fixed-rate loans will only be affected at the time of your renewal.
  → Make an informed decision about which rate you choose
   

• If you have savings at your disposal, this could be an opportunity. When several stocks are down, it’s a good time to buy. In addition, some investments, such as guaranteed investment certificates (GICs) or bonds, see their interest rates rise during a period of rising rates.
  → Learn more about GICs
  → Learn more about bonds
  
  
• If you’re concerned about your investments, discuss them with your financial advisor. Above all, don’t make hasty financial decisions. In a long-term strategy, it’s normal for the value of certain investments to fluctuate. Remember that just because inflation or policy rate are rising, or markets are volatile for a period doesn’t mean your financial plan has to change.
  
  
• Think about how to invest your money and stay the course
  
  
• If you have debts, such as a line of credit, a personal loan, or a credit card balance to repay, prioritize paying off the ones with the highest interest rates
  
  
• Consult our tips for paying off your debts
  
  
• If you want to increase your cash flow or build an emergency fund, you may want to postpone certain projects, such as a trip or renovations.
  
  
• Choose systematic savings to simplify your life

If there’s a policy interest rate hike, take some time to think about your current projects and future plans, and make informed decisions. You might save money by postponing a major project rather than tackling it now.

You prefer to invest with the help of an advisor? Discover our advices to choose the best investing strategy for you.