What is the policy interest rate?
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.
What is inflation?
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 affects your savings and investments
How does an increase in the policy interest rate affect my finances?
Most people will be affected by a policy interest rate increase. This means that they’ll pay more interest on their loans. Households and businesses are more likely to reduce their expenses when this happens. Demand for goods and services is expected to decline and their prices may stabilize in the future:
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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 -
If you have a variable rate mortgage, your monthly payments
will increase. Fixed rate mortgages will only be affected when you
renew.
→ Learn about the difference between a fixed and variable rate -
This could be an opportunity to make new investments. While
the market is down right now, it could be the right time to buy low
on interesting stocks. Also, investments such as GICs or bonds see
their interest rates rise in a period of rising rates.
→ Learn more about GICs -
If your mortgage term expires in less than 6 months, an early
renewal may be the key to helping you secure a lower rate before the
next rate increase without penalty. If your term expires in more
than 6 months, you'll need to consider the penalty fee when making a
decision on early renewal.
→ Learn more about early renewal -
While food, gas, and furniture cost more than this time last
year, now's the right time to readjust and evaluate your
budget.
→ Create a simple and balanced budget in six steps
Policy interest rate hike: do I need to review my financial plans?
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. Use our tools to elect the best investing strategy for you.
Would you like to discuss this with us? Contact your National Bank advisor or your wealth advisor at Financial National Bank for more info. Don't have an advisor? Schedule an appointment in just a few minutes.
