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Policy interest rate hikes: how will they impact my finances?

21 April 2023 by National Bank
Couple analyzes state finances, sitting at the kitchen table

If the Bank of Canada decides to raise its policy interest rate to fight inflation, what does this mean for your financial plans? Here’s what you need to know about the impact of an increase, and what you can do to protect your finances and purchasing power.

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What is the policy interest rate? 

The policy interest rate is the fixed interest rate set by a financial institution for a country or group of countries. This determines how much it will cost to borrow money from a central bank.

In our case, the Bank of Canada is the one that is regulating, among other things, the country's economic activity. Once the Bank of Canada sets the policy interest rate, other financial institutions use it to set the interest rate on a variety of loans (personal, mortgages, etc.) offered to clients.

The latest increases are intended to continue efforts to counter rising inflation rates affecting Canada, the United States, and the world.

What is inflation?

Inflation is an overall increase in the average price of goods and services. When inflation is low and predictable, it means that the economy is doing well and the overall value of money is stable. Long story short, it means you have more money in your pocket.

When inflation is too high, consumers, businesses and investors lose purchasing power. This means overall economic development suffers. When this happens, the Bank of Canada will usually step in with a policy interest rate hike to try and stabilize the economy.

Better understand how inflation and market volatility affect your savings and investments

Impact of a policy interest rate increase: what are the solutions for my finances? 

When the policy interest rate rises, borrowers pay more interest on their loans. As a result, households and businesses may want to find solutions to reduce their spending. Demand for goods and services is expected to decline and their prices may stabilize in the future.

Until then, here are some ways to counter the impact of rising policy interest rates and inflation on your finances:

Policy interest rate hike: do I need to review my financial plans?

If there’s a policy interest rate hike, take some time to think about your current projects and future plans, and make informed decisions. You might save money by postponing a major project rather than tackling it now. 

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