The Bank of Canada has raised its policy interest. If you’re wondering why—and how the increase will affect your financial plans—read on for the answers.
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.
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.
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:
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.
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