On the 13th of July 2022, the Bank of Canada raised its key interest rates by a whole dollar percentage increasing from 1.5% to 2.5%. The purpose of this increment was to curb the high inflation rate in Canada. This is a 4 % raise and it’s the largest increment by the bank of Canada since 1998. Absolutely a Historic benchmark in Canada.
The Implications of Hiking Key interest rates.
What does this increment in the key interest rates mean to the ordinary Businesses and citizens?
It means that we need to brace ourselves because the prices of many items are going to go up by $1.86.
It means that it’s going to cost the ordinary Canadian more dollars of expenditure going towards their monthly basket. You will surely see an increase in fuel prices, and your grocery bill will raise up too.
Even so, the bigger ticket items like homes, vehicles and vacations are going to be much more expensive.
Why did the Bank of Canada raise interest rates?
In a press statement, Tiff Macklam the Governor of the Bank for Canada said that, ” the raise reflects very unusual circumstances. Inflation is nearly 8% a level not seen in nearly the last 40 years“. Tiff went on to state that the inflation has risen too high and hence it worryingly was here to stay.
Therefore to counter this inflation the Bank of Canada has raised its interest rates with the hope that it can be able to curb and bring down the fast-raising economic growth in the country.
The governor also stated that due to the shortages in the work force and in the supply of goods and services, the BoC needed to increase the rates to slow down the demand and to allow for the supply of manpower, goods and services to catchup.
Tiff said that the BoC needed to bring down the inflation to a low of 2% with a soft landing.
How will the rate increase affect the wallets of individuals?
As an ordinary citizen you will realize that if you do have any loans or borrowings, there will be an increase in your payments. Credit card institutions will not directly raise the borrowing rate of 19%, but you will notice significant charges passed on to you through the hidden fees. Hence you need to check and read out your monthly credit card statements very keenly.
This interest rate hike will affect home buyers. Governor Tiff also mentioned that there will have to be moderation in the consideration of buyers. This means that those who already purchased homes in the past one to two years and are still dealing with their first quarter of mortgages, will see a significant raise in their monthly payment rate. However this is dependent on if they took a variable rate mortgage or a fixed rate mortgage.
For those who have not yet purchased a home and were considering that option, you may need to re-evaluate your decision. This is majorly because if the home you hoped to buy was going for $500,000, then your monthly repayment mortgage rate will have to increase significantly.
Scotia Bank gives a great analysis of a borrowers payments. It explains that if your mortgage lender had evaluated your repayment rate as $2,366 for a 25 year mortgage with 3% before the interest hike, then the same mortgage will now cost you $2,630 at a 4% increase over the same period of 25years.
If you are significantly affected by your past borrowings from credit cards or loans, this is the moment where you should reach out for financial help. Financial advisors can help you work on a plan that can reduce the amount of debt that you owe. The way of getting this help is by contacting a legal debt advisor and that is by using a licensed insolvency trustee like Spergel.ca
What can a Licensed insolvency trustee do to help?
The licensed insolvency trustee will be able to look at your debt situation and help you to walk things through.
There is no shame in approaching a licensed insolvency trustee. Currently, we are in a situation that is only getting more critical as the interest rates shall continue to be hiked, and you will feel more pressure on your finances.
According to the Bank of Canada, the next hike for interest rates will be in September 2022 the situation will not improve until much later and hence this is the moment for all those who have high debt to work on it before it gets critical.
You need to ensure that you are not taking extra debt, like credit cards, over drafts or borrowing funds from the bank or any financial lenders.
How does this Interest rate Hikes affect businesses?
The fact is that businesses have taken a hit during this inflation right from the Pandemic. Many businesses have suffered significant labor shortages to a wider extent. While employees have quit their jobs during the pandemic and other workers were caught-up in work fatigue, the labor shortage is causing a demand for a pay raise in many positions. This adversely has an effect to the overall profit margins for many businesses.
Additionally a number of businesses faced low production of good and services as a result of the labor shortage. Going with what Governor Tiff stated in the announcement, the increase in the interest rates will help to alleviate the high demand of produce, whereby the supply cannot match up.
From a business perspective, it would be helpful to consider different means of complimenting your income through looking at new ways to market your products. It is important to market your business more aggressively through new age social media channels like Youtube, Instagram, Twitter and even LinkedIn. Business can learn that this will diversify the extra streams of new clients and potential give a boost to their business during this phase of inflation.
You will need to cut down on unnecessary hires or expenses to meet this financial push. Ensure that you do not take on extra costs that are going to create more financial stress on your personal or family obligations. These are hard times when you need to ensure that you are not overspending your money.
How should Individuals plan to cushion this inflation?
You need to consider working out a formula that will help you to contain your current expenditure.
Individual should not shy away from considering an extra job. The extra job will create extra income to complement that extra dollar of increase that is going to affect your lifestyle.
Consider slowing down on all unnecessary expenditure plans, that would otherwise drain your accounts out faster than you can replenish them
Ensure that you’re not spending your extra money on unnecessary expenses such as holidays, cloth shopping, upgrading your vehicle, picking unnecessary grocery or luxury items.
What is the expectation from the bank of Canada?
Typically, people tend to cut down on their expenses during unforeseen times ahead. The BoC governor Tiff, stated that this key interest rate hike will encourage more citizens and businesses to hold back their finances through savings. This is a good measure to quickly bring down the current demand.
As you can see form the graph above this was an extremely serious economic occurrence that needed extreme measures and hence the government of Canada expects to see a significant decline or shift in the graph, resulting in the slower growth of the Canadian economy.