The current economic environment of inflation and rising interest rates in Canada affects us all directly. That's why it's important to understand the role interest rates play and the impact they have on our daily lives.

Interest rates in 2022

In 2022, the Bank of Canada's key interest rate rose from 0.25% at the beginning of the year and has steadily increased to 3.25% as of September 7, 2022. On October 6, Bank of Canada Governor Tiff Macklem announced that it would be necessary to raise interest rates again in order to fight inflation.

At first glance, our portfolio may not appreciate a rise in interest rates. But it allows, for example, to control inflation and prevent house prices from rising too much. The same goes for essential goods. With inflation reaching 8% last June, raising the key interest rate becomes crucial.

How are interest rates determined?

Interest rates are definitely not set randomly. The Bank of Canada dictates the policy rate, and the policy rate has a direct influence on whether the major banks raise or falling interest rates.

There are eight predefined dates on which the policy rate can be changed, although it is also possible to change it outside of these dates. To give you an idea, in 2022 these pre-established dates were January 26, March 2, April 13, June 1, July 13, September 7, October 26, and December 7.

This policy rate is itself influenced by various factors: the rate of inflation, the money supply, the duration of borrowings, and monetary policy. Generally speaking, the Bank of Canada changes the policy rate in order to stimulate the economy, or rather to slow it down if there is too much inflation. Second, financial institutions rely on this rate to lend funds in the financial markets.

Lowering the policy rate encourages people to borrow more and thus spend more to keep the economy moving. In the opposite context where there is high demand and high inflation, an increase in the policy rate makes borrowing more expensive and thus encourages people to save. The change in interest rates is therefore directly related to the supply and demand of the current economy.

The impact of interest rates

In concrete terms, changes in interest rates have direct consequences, positive or negative, on investments, debt, stock markets (stocks), bonds, and margin accounts.

An increase in the interest rate could therefore increase the rates of your savings account or your guaranteed investment certificate (GIC) for example, but also that of your mortgage payments. These same effects can be observed on any other loan; Lines of credit, student loans, and auto loans are affected.

Mortgage interest rate

The real estate market in recent times illustrates the effect of changing interest rates. Demand has been very strong during the pandemic and as a result, prices have risen quickly. Rising interest rates are helping to control this meteoric rise in prices by slowing demand, as buying a high-priced home with a high-rate mortgage simply becomes unaffordable.

If you're considering buying a home, you may be wondering if you should take a fixed or variable mortgage rate. There is no right or wrong answer to this question; Each person and each file is unique.

The main thing is to have a medium- and long-term vision when making decisions. Current rates can cause a lot of stress, but it's best to look at the big picture. In addition, there are ways to protect against rising interest rates, but these come with special conditions. It is important to discuss this with your financial planner and mortgage broker.

Credit cards

The good news about all these changes is that when we talk about credit card interest rates, they change much less quickly. And in the credit card market, there is no shortage of variety. Obviously, the goal is always to avoid as much as possible having to pay interest on your credit card balances since these fees increase very quickly.

If this is not an option for you right now, fortunately, there are low-interest credit cards on the market, as well as the balance transfer trick to reduce the interest costs to be paid.

While we can't control interest rate hikes or decreases, it's easier to make informed decisions when we know the impact on our personal finances. When it comes to important financial decisions, it is of course recommended consulting an expert to choose what best suits your personal situation, in the current economic context.

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