That was a bit of a mouthful, so to help make things a little more plain, we’ve taken a look at how four major industries ultimately feel the effects of decisions made by the Bank of Canada.
The Bank of Canada’s most effective tool for influencing monetary policy is its overnight interest rate. Around eight times per year, the Bank announces whether it will raise or lower the rate, or keep it the same.
This rate has a trickle-down effect on all major Canadian banks over time. If over a two year period the Bank of Canada raises its overnight rate by one per cent, banks will follow suite to compensate by raising interest rates on things like mortgages, credit cards, and lines of credit.
While the higher return on interest is a benefit to the lender, higher rates will also discourage citizens from borrowing from the banks.
While it typically takes years for any kind of noticeable trend – good or bad – to develop, an increase to a mortgage rate of even half a point could result in an additional $150 per month for the homeowner.
As the Bank’s overnight rate goes up – as it has since 2017; from 0.75 per cent to 1.75 per cent currently – fewer people will be in the market to buy real estate.
Any small or start-up business is sure to feel the impact of an interest rate hike, as these businesses, for the most part, rely on some sort of funding.
An increase of $1.00 per month in interest payments directly translates to a decrease of $1.00 per month in profits.
The Bank and its staff base their decisions on emerging trends within Canada’s economy. When the economy slows, the Bank takes measures to encourage spending, and when growth reaches a boiling point, it slows things down again to keep inflation predictable and consistent.
By closely monitoring decisions being made by the Bank of Canada – and attending events like our VIP luncheon with Bank of Canada Governor Stephen Poloz – elected officials and government employees can not only get a good picture of the current state of Canada’s economy, but also a sense of the direction in which its trending.