Why Interest Rate Announcements by the Bank of Canada are Important
Canada’s central bank, the Bank of Canada is vital to our economy
And yet many do not know why the interest rate announcements are so important to their everyday lives; thinking instead that it will only affect their banks instead.
To help clear up this confusion and showcase why you should be taking notice of these announcements when they arise, we’ve created a brief guide for you to follow:
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The Bank of Canada – what is it?
Before getting into why it’s so important, let’s first define exactly what the Bank of Canada is for those who don’t know.
A Crown corporation, this bank was chartered in 1934.
Responsible for Canada’s monetary policy, the sole authority for distributing Canadian currency and providing fund management services it is designed to promote a thriving financial system throughout the country.
Because of this, it’s not your typical high-street bank.
As it’s called the central bank, it’s an institution that high street banks use to borrow and invest in.
As it lends money to banks (along with other institutions), the rate that’s offered to everyday people is affected from then on.
Known as the Overnight Rate, it determines what rates citizens are charged (referred to as the Prime Lending Rate) when they take out a loan from them.
This is one of the reasons why it’s important to keep up to date with any interest rate announcements as it can affect how much you’ll have to repay on your mortgage or any other type of loan taken out through your bank.
For example, if you see that the interest rate has been increased by 20%, this quickly adds up to thousands of dollars each year.
This, on top of your initial loan amount, can see you in financial trouble if not handled correctly.
If you notice an increase and you think that you can’t manage your repayments, it’s vital that you contact your creditors in advance.
Even though they should inform you of this rise in documentation following an announcement, it’s good to bite the bullet and be proactive before it starts to make a real impact.
Knock-on effects of an increase in interest rates
If the rates go up and your budget can’t handle it, it might result in you falling behind on your payments.
Because of this, your creditors might start to add extension payments the longer that it takes you to repay your debts.
Also, many credit card companies now tack on an average of 5% increase on your ARP rates, making it far more difficult to cover what you owe.
Even if you file for a Consumer Proposal or take on a Debt Management Plan with the help of a Licensed Insolvency Trustee to help repay what you owe, you will have to face an impact on your credit score.
However, through these repayment plans you will be one step closer to regaining your financial stability as you’ll be paying back your creditors in a way that’s affordable for you.
Which types of interest rates can the Bank of Canada change?
As aforementioned, your bank will adjust the interest rate that it offers you based on how much they themselves are charged by the Bank of Canada for borrowing money.
However, that’s not to say that all types of interest rates are affected in the same way:
Variable interest rates
Variable interest rates (e.g on mortgages and other types of loans), are significantly impacted when interest rate announcements by the Bank of Canada represent a change.
If you’re on a variable rate mortgage, for example, changes have an immediate effect.
Typically, it means that along with the payments the rates rise.
This not only affects those already with a mortgage, but first-time buyers who are thinking of acquiring one.
As they have the potential to rise by a maximum of 0.25%, it will make first time buyers think twice – leading to them instead choosing a fixed-rate mortgage or renting to avoid the hassle of the ever-changing rates.
Those with variable mortgages will also choose to have it for a maximum amount of years (such as a 5-year mortgage), so that they can then change it to a fixed one when the term is over.
Even if they opt for a variable mortgage after the term ends, they can change providers to one that has more favorable interest rates.
With a fixed-rate loan that has a fixed interest rate, it’s undeniably not as affected by a change as a variable one would be.
However, that’s not to say that if you have one of these, you should ignore interest rate announcements by the Bank of Canada altogether.
If there is an increase/s over time, then your interest rate whether it be on a loan or a credit card can actually be affected.
Informing you of an increase due to a decision made by the central bank or one that the bank made independently from there, it’s something that you should pay attention to as it will obviously affect the amount that you have to repay each month.
The reason why the Bank of Canada raises interest rates
So you might be wondering why the Bank of Canada raises interest rates ever so often.
And the reason behind this is simple. It’s done as a way of reducing the amount of debt that Canadians take on each year and to reduce how much you spend.
It’s no secret that Canada is heavily in debt.
Something that’s been rising for many years, the Bank of Canada needs to find efficient ways of reducing this so that the economy is in the best position possible.
And although these rises in interest rates certainly don’t seem favorable at first to the everyday person, there are actually many benefits that can come with it, including:
- Protection from an economic downturn;
- It helps to control the demand for credit;
- Increases the return for saving;
- Stabilizes housing costs;
- Amongst others.
Although it might not make much sense to you why the central bank would want you to borrow less from your bank, they cleverly look towards the future and forecast what the economy might be like.
Because of this, they can map out a prediction as to how the change in interest rates will maintain a stable economy.
For example, recently due to the Coronavirus outbreak, the Bank of Canada has made several announcements regarding the interest rates.
They have declared that in order to ensure that the financial system is kept healthy, they will hold an interest rate at 0.25%.
What the interest rates will be when we come out of this, we’ll just have to see – just another reason why you should keep up to date.
The Bank of Canada and the economy
As aforementioned, the Bank of Canada’s actions are primarily designed to benefit the economy.
From trying to keep the inflation rate in check to changing interest rates to decrease borrowing, their efforts are key to maintaining a favorable financial position.
When it comes to inflation, by monitoring it and taking actions to alter it, the economy and ultimately everyone’s livelihood is protected.
Allowing you to make the best investment decisions possible with the help of a professional, it enables everyday people to live the lifestyle that they want.
Raising or lowering its policy interest rate to achieve the inflation target it desires, it impacts the cost of services and goods.
This inflation which can have drastic consequences on the economy depending on its level, is another reason why you should be in the know when it comes to interest rate announcements by the Bank of Canada.
Be proactive in your budgeting and spending
As the Bank of Canada will always shape its decisions around the economy, it’s important that you’re proactive and take the appropriate steps towards a healthy financial situation.
This is because the economy can be affected by so many different external factors – so you never know exactly how it will play out no matter how prepared you are.
The announcements regarding interest rate increases or decreases occur approximately every 6 weeks.
So make sure that you read these regularly and that you’re always planning for the future.
Even though you have to be flexible in your financial decisions, by being in the know of what’s happening from the get-go, you hopefully won’t be significantly affected when an unfavorable announcement comes through.
Find out more today
Are you looking for further advice surrounding interest rate announcements by the Bank of Canada, how to budget more effectively or for assistance with debt relief?
Then get in contact with Bankruptcy Canada today.
Working with Canadians since 1999, we’re always your first port of call for expert advice.
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