As we've all heard by now, the Bank of Canada increased interest rates by 50 basis points in April, following a 25-point increase earlier in the year. This is sort of a big deal, prompted by the mess that has been the early 2020s. Rising prices spurred by the war in Ukraine — on top of already-high inflation — affected the Bank of Canada's recent decision.
But what does that actually mean for young Canadians? Let's focus on two financial areas that are being directly impacted by increased interest rates: bank loans and investments.
Why increase interest rates?
Hiking up interest rates by 50 basis points (0.5%) isn't exactly common. But there are good reasons to hike up rates. For one thing, it helps to reduce the effects of inflation for everyday Canadian.
Inflation is an increase in the price of goods and services. According to Statistics Canada, the Consumer Price Index, a measure of prices for goods, went up by an entire 5.5% between March 2021 and March 2022 — and that's excluding oil prices. In March, Canada saw a month-over-month increase in gas prices of 11.8%!
Increasing interest rates can also help to cool off the housing market.
How will increased interest rates affect the housing market?
Simply put, when the Bank of Canada chooses to increase or decrease interest rates, all of the other banks in the country follow suit. Different banks may have slightly different rates, but they'll all be near the rate set by the Bank of Canada. One market that is especially affected is the housing market.
When interest rates increase, this includes the interest rates on a mortgage. So when interest rates are higher, mortgages cost homeowners more in the long run. So high interest rates give potential homebuyers pause, which in turn can encourage sellers to lower their asking prices.
Conventional wisdom would suggest that taking out a loan — like a mortgage — is best done when the interest rates you'll be charged are low. On the flip side, it's perhaps preferable to invest when inflation rates are high.
How will increased interest rates affect investments?
When you make an investment, the hope is that your money will earn interest, meaning that it grows. There's a whole world of investments out there, but for the sake of this article let's focus on Guaranteed Investment Certificates (GICs).
Fixed-rate GICs are a low-risk way for Canadians to invest money. Basically, you invest money at a set rate (meaning the interest rate on the GIC will not change) for a specific amount of time. These GICs are guaranteed to grow at the fixed rate, hence the name.
The fixed rate on a GIC will depend on the interest rate set by the Bank of Canada.
This means that, for example, the people who invested in a fixed-rate GIC when the interest rate was lower could get a smaller payout than people who waited until now to invest.
