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.
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:
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.
If you have a variable-rate mortgage, your monthly payments will increase. Fixed-rate mortgages will only be affected when you renew.
If you invest in new products, such as Guaranteed Investment Certificates (GICs) or Canadian bonds, you might see higher returns. If you hold mutual funds, you might see the value of your portfolio go down in the short term.
While food, gas, and furniture cost more than this time last year, the good news is that prices should stabilize in the medium term.
Policy interest rate hike: Do you need to review your 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. To understand all your options, talk to us and we will do our best to help you in your current situation.
- Your Creed Capital Management Team