Mar 16, 2022
On March 2nd, 2022, the Bank of Canada increased its overnight interest rate by 0.25% to 0.50%, in what is widely expected to be the first of a series of small rate hikes this year to cool the economy and tame inflation.
The overnight rate, also know as the Bank of Canada’s key lending rate, is the interest rate major Canadian banks pay to borrow money for very short periods of time. The overnight rate is also used by banks to determine their prime rate; the interest rate banks’ offer to its best customers. As the overnight rate increases, so do prime rates.
Variable interest rates loans are also tied to a banks’ prime rate. For example, when a bank offers at loan at “prime plus two per cent” they are quoting a variable rate loan product. As the prime rate increases, the variable interest rate increases as well.
As you can see, a rate increase by the Bank of Canada has a domino effect. This is the key tool the Bank of Canada uses to adjust financial conditions and how their actions feed through to the real economy.
If your debts have a fixed interest rate, the Bank of Canada’s rate increases won’t affect you in the short term. However, if you have variable-rate debts, such as those listed below, you can expect your interest costs to rise, perhaps several times this year. Lenders can change a variable interest rate at any time. For borrowers, this means their rate is likely to fluctuate over the life of their loan. If your bank raises rates, your repayments will also rise.
Pay off high-interest rate debts first
We don’t know how much interest rates will increase this year, but targeting your variable rate debts for repayment now will help you maintain financially flexibility and remain financially solvent.
The views expressed are those of the author and not necessarily those of RGF Integrated Wealth Management, which makes no representations as to their completeness or accuracy.