Jul 25: Bank of Canada Raises Interest Rates

Johnathan Holland

A few days ago, the Bank of Canada raised their interest rate for the first time in seven years. Their new interest rate is 0.75 percent. The Bank of Canada’s previous interest rate before the hike was 0.50 percent. Interest rates hiked by a quarter.

After the Bank of Canada raised their interest rate, the prices of the Canadian dollar went up as well. The price of the Canadian dollar was up by $0.76 from the average on July 11, 2017.

The rising interest rates didn’t come as a shock to most people. The interest rate hike was expected after senior Bank of Canada officials discussed in speeches and interviews that lower interest rates had done their jobs and that the Canadian economy was doing well.

Bank of Canada governor Stephen Poloz acknowledged that the bank raised their interest rates despite inflation being lower than its target of two percent. He says that the bank thinks that the weakness in inflation is only temporary.

There are more disadvantages compared to advantages when banks raise their interest rates. Not everyone understands what it means, but it’s important to know.

People usually think about mortgages and saving accounts when they hear that interest rates are rising, but mortgages and saving accounts aren’t the only things impacted. Mortgages and saving accounts are the main things that impact the general public.

Individuals can easily compare changes in them by using websites and mortgage calculators to see how it impacts them.

Higher interest rates negatively impact homeowners, business owners, loan takers, the government, the stock market and the economy.

Chapter 1

Pros of Rising Interest Rates

The biggest advantage of rising interest rates is that people who have saving accounts will see an increasein the amount of interest they earn. Their money will grow and compound during the higher interest rate period. High interest checking, saving and money market accounts will have a better deal.

Believe it or not, rising interest rates may help people who are looking to buy a home. Rising interest rates could bring house prices down. Since it will cost more to get a loan, there may be less buyers. When there aren’t a lot of people looking to buy a house, prices may decline even further.

If you’re planning on opening a certificate of deposit, right now is the best time to do so. A certificate of deposit usually pays a fixed interest rate. Generally, funds will remain in the certificate of deposit for a specific period. Some banks offer rising interest rate certificates of deposits. This allows the owner to change the interest rate term during the duration of the certificate of deposit if interest rates rise.

Chapter 2

Cons of Rising Interest Rates

The biggest disadvantage of rising interest rates is that the cost of borrowing money will rise. This will impact all lending companies. Credit card rates and mortgages will have higher interest rates.

Unfortunately, another disadvantage is that taking out a mortgage will be harder to do. A 0.75 percent increase on mortgages is high. Even though it doesn’t sound high, the 0.75 percent increase the cost of interest on a mortgage by tens of thousands of dollars. If you’re thinking about purchasing or refinancing a home, now is the perfect time to do it before interest rates rise again.

Consumers will be negatively impacted because interest rates for credit cards are higher. Most credit card companies charge their customers prime plus a set amount. The prime rate is what you hear frequently quoted. If the prime rate increases so will your overall credit card interest rate. Rising interest rates will negatively impact people who have a balance on their credit cards.

Higher interest rates impact the stock market as well. Traders and brokers will have less money to borrow because of higher interest rates. When traders and brokers have less money to borrow, there will be less volume seen in the stock market. When interest rates rise, investors will sometimes take money out of the stock market and put it in bonds so that they have a safer investment.

Rising interest rates will hurt an economy if the economy isn’t growing rapidly. When interest rates are lower, it’s cheaper to borrow money. Since it doesn’t cost as much to borrow money, more money is available to buy goods and hire people. Low interest rates help the economy grow. If the economy doesn’t grow, the country could possibly find itself in recession.

Chapter 3

How It Affects Homeowners

Rising interest rates negatively impacts homeowners. Many potential homeowners are constantly thinking about rising interest rates. The Federal Open Market Committee recently voted to raise short-term interest rates in early March. The market is still expecting additional increases in 2017 and 2018.

Long-term interest rates aren’t directly set by the Federal Open Market Committee, but they’re indirectly affected by the decisions of the committee members. The committee members are members of the Federal Reserve Banks.

The Federal Reserve System is responsible for maintaining a monetary policy and creating a stable supply and demand that maintains a healthy economy and market stability. The Federal Reserve System tries to avoid significant inflation and deflation. They do this by setting targets and changing short-term interest rates to promote stable prices.

Changing short-term interest rates negatively impacts credit card and car loans interest rates as well as increasing the prices of goods and other services.

Many homeowners don’t realize that an adjustable mortgage rate may offer them significant savings compared to a long-term fixed rate mortgage loan. If you don’t know if you’re going to be in your home long-term, you may want to choose an adjustable mortgage rate.

Chapter 4

How It Affects Business Owners

Rising interest rates can negatively affect business planning, cash flow and customer spending and saving.

Rising interest rates will likely have an impact on the owner’s ability to grow the business. Banks will charge businesses more for business loans. Small business owners may not be impacted immediately but business owners who have loans with fluctuating interest rates may have a difficult time repaying loans.

Small businesses usually operate with a limited cash flow. When interest rates rise, the business owner will need more money to pay the loan back.

Another possibility is that customers may not spend as much money because of higher interest rates impacting their interest on their credit card payments. If customers are spending more money on their personal loans, they’ll have less disposable income.

If businesses see a decrease in the amount of profit they bring in, they may be forced to pay their receivables or put off expansion and investment plans. All of these things can further slow the growth of the business.

The only advantage is that consumers and businesses will likely want to save excess cash instead of spend it. Rising interest rates may not be a disadvantage to small businesses all the time. The federal government raises rates when their confident that the economy will robust. A robust economy is the best scenario for businesses and consumers.

Chapter 5

Final words

There aren’t many advantages when it comes to rising interest rates. The only advantages are that people receive higher interest on their checking, savings and money market accounts.

There are many disadvantages when it comes to rising interest rates. Homeowners, business owners, the government, borrowers, the stock market and many other people are impacted when interest rates rise. Higher interest rates hurt the economy and the stock market.

If you already have a fixed rate mortgage loan, you don’t have to worry about an increased interest rate on your bill each month. If you have an adjustable mortgage rate, the rising interest rates may affect your rate when the introductory period ends.

Just like the increase in the United States, people in Canada will see an increase in long-term interest rates as well. Many people in Canada think that interest rates will continue to rise. If the interest rates do continue to rise, it’ll be small increases.

People in Canada can expect to see increased interest rates in the fourth quarter. There will likely be an increase in interest rates from both central banks in 2018.

The Bank of Canada previously increased the overnight rate in August 2010, when they increased the interest rate by one percent. After Stephen Poloz became the governor of the bank, the interest rate was lowered twice in 2015 to 0.50 percent. That’s where it remained until early July.

With the Canadian economy performing well, the bank increased its forecast for growth this year. The bank said that they expected real gross domestic product to grow by 2.8 percent in 2017. The outlook in April 2017 was 2.6 percent.

The bank said that they expect growth to moderate over the next two years. They’re predicting that it’ll be two percent in 2018 and 1.6 percent in 2019.