Most Canadians know that decisions made by the prime minister and parliament can have dramatic effects on their lives.
But this year some of the most critical decisions will be made by an unelected agency, the Bank of Canada. Like its counterpart in the United States, the Federal Reserve, leaders of this group decide whether to raise interest rates, and by how much. Their decision is an example of monetary policy, and the effects immediately ripple throughout the economy. When the Bank of Canada raises its key interest rate, known as the prime rate, loans offered by every financial institution in the country rise. That means that when consumers take out an auto loan, they must pay more for a car. When a family wants to buy a house, they must pay more for a mortgage. Credit card interest rates soar, making it painful to carry a large balance. Because consumers pay more for cars, houses and other items, this has the effect of changing their purchasing decisions. People buy less, and as a result manufacturers produce fewer goods and service industries such as restaurants employ fewer workers. Soon, every Canadian begins to feel the effects of the Bank of Canada’s monetary policy. Historically, the key interest rate set by the Bank of Canada was much higher in the 1980s. Even in the early part of last century it was about 10 times higher than the current rate. Of course, many Canadians remember the economic dislocations of 1980 to 1982, when the combination of stratospheric interest rates and deep economic recession made it extremely difficult to buy a house, or even find steady employment. For many potential homebuyers, higher mortgage rates come at a particularly bad time. That is because limited supply has dramatically raised home prices in many areas of Canada, especially in red-hot urban markets such as the GTA and Vancouver. With these sky-high prices, even a minor uptick in mortgage rates represents hundreds of dollars a month. For homeowners who hold “open” mortgages, the cost can be even higher. Unlike “closed” mortgages, the interest rate for open mortgages rises or falls with the prime rate. Some of the effects of rising interest rates are less commonly understood. For example, many prospective college students and their families believe that student loans are insulated from Bank of Canada rate hikes. In reality, most student loans are linked to the Canadian central bank’s prime rate. In the case of variable loans, a student typically pays 2.5 percent over the prime rate; in the case of a fixed-rate loan, lenders add 5 percent to that key rate. There are specific cases in which particular groups may benefit from higher interest rates. Savers who prefer to keep their money in cash will see higher returns in bank savings accounts, money market accounts, guaranteed investment certificates, guaranteed interest options, and similar investment vehicles. It can be argued that all savers, homebuyers and consumers will benefit from higher interest rates in the long-run. That is because the purpose of higher rates is to get inflation under control; and inflation is the most costly part of every family’s budget. Important information about mutual funds is found in the Fund Facts document. Please read this carefully before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Unit values and investment returns will fluctuate. Insurance products, including segregated fund policies, are offered through Beyond Business Financial Solutions Inc., and Investment Representative Nathan Garries offers mutual funds and referral arrangements through Quadrus Investment Services Ltd. |
AuthorNathan Garries is a Certified Financial Planner who has been involved in financial advising, financial planning and wealth management for over two decades, carrying on a family tradition of three generations. Archives
October 2022
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