The Bank of Canada raised its interest rate to 0.5 per cent on Wednesday. This increases the cost of borrowing money in Canada. Here are 5 facts you need to know about the interest rates and inflation.
1. When The Bank of Canada (BOC) raises its interest rate, interest rates at all other banks in Canada go up too.
This is because the major banks borrow money from the BOC and then lend to their customers with a markup.
2. Before the pandemic, the BOC interest rate was 1.75 per cent, but it was lowered to 0.25 per cent at the onset of the pandemic in order to help vitalize the economy.
When the cost of borrowing goes down, people can borrow and spend money easily. This helps businesses stay in business and even increase prices due to increased demand.
3. But now there is too much inflation, largely due to supply chain disruptions. So interest rates must be raised, starting with yesterday’s increase to 0.5 per cent.
When the cost of borrowing goes up, things like mortgages and lines of credit costs more. This discourages borrowing and spending. In response, companies are encouraged to stop increasing prices and may even lower them. This reduces inflation.
Note that the main reasons for the recent global supply chain disruption is because of the shortage of workers and the volatility of demand for products due to COVID-19.
4. While pandemic induced Supply chain disruptions are still occurring, the invasion of Ukraine by Russia has significantly worsened the problem. It has caused the price of commodities like fertilizer, natural gas and oil to skyrocket.
This is because sanctions imposed on Russia, a major producer of these items, prevents them from being exported to many countries. Russia has banned the export of its own products to western countries in response. This results in more supply disruptions that increases the prices of all other items.
5. What does this mean for you and me? It means that until the interest rates start to go back down and inflation stabilizes, we need to save more and spend less. Here are some specific things you can do to help cope with inflation:
- Avoid buying a car or taking out a loan to make large purchases if you can. Instead of getting a new car, consider detailing or an upgrading your existing car.
- Grow investments, rather than savings accounts. Learn to invest and research investments that go up with inflation and put your money there while reducing unnecessary spending. Your own education can be one of the best investments during inflationary periods.
- Not all groceries are influenced by inflation at the same rate. Research items that are less influenced by inflation, like vegetables and fish products, and consume more of those than items that are strongly influenced by inflation, like meat.
Read more about financial literacy to defend your finances here: