Bank of Canada Increases Interest Rate. First Time In Seven Years

This week the Bank of Canada raised its interest rates from 0.50% to 0.75%.  The decision explained in full in the Bank Of Canada Official Statement was not entirely unexpected and is a good sign for the economy of Canada as a whole. Although it may cause an uncomfortable pinch in the wallet of people already struggling to pay their bills. 

Why The Bank Of Canada Raised Interest Rates

The bank of Canada monitors several areas of the economy closely to make its decision and says the recent data they’ve looked at is strong.  Inflation rates are steady and under control.  The Canadian GDP has grown for the third year in a row.  Over 350,000 jobs were added in 2017.  People have been buying more than expected and investments from homes and businesses have been increasing.  All are good indicators of the health of the Canadian economy.

Internal statistics are not the only factors taken into account, however.  The state of the US economy also plays a role in the Bank Of Canada’s decisions.  Because Canada exports a majority of its natural resources to the US, a strong US economy means more business for Canada.  Say what you will about Trump; the US economy hasn’t done bad during his presidency and all signs point to it increasing.

Even with all these strong positive indications, the interest rate hike is not a light decision and the effects will be monitored closely. In particular, policymakers are watching the NAFTA agreement to see whether the US will pull out from the deal and what the effect of that will be on the economy.

How The Interest Rate Hike Will Affect You

If you have a fixed interest rate on your mortgage or loans your payments will not increase.  If you have a mortgage with a variable rate you can expect a small bump in your monthly payments, all of which will go to interest and not your principle.  Same goes for any Lines Of Credit through your bank and other lenders that use variable interest rates.

It all goes back to the contract with your lender and now may be a good time to double check it if you don’t know and start thinking about how this increase, and other increase, will affect you.  The Bank Of Canada will hold its next overnight interest rate announcement on March 7, 2018, and there will be one more announcement before the end of the year.

Why Increasing Interest Rates Are Good For Canadians In the Long Run

No-one likes paying more interest however they have a very important role in controlling an even worse threat to our lives:  Inflation.  Inflation rots the value of our savings and decreases the purchasing power of every dollar we make or have.

Unchecked, inflation can create extreme situations like the hyperinflation of the German mark in 1920, or the current hyperinflation problems in Venezuela.  Comparatively, paying a few hundred extra dollars a month on our loans is much better than the price of bread soaring to $200 million dollars.  

To really understand inflation, interest rates and how it works together in an economy there is a YouTube video from iconic hedge fund manager Ray Dalio titled “How the Economy Works” that explains exactly how banks use interest rates to control inflation.  Possibly one of the best and most simple, clearly-put videos created about a complex machine like the economy.

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