BusinessNew Bank of Canada interest rates, and what they mean for Canadians

Jamie QuadrosNovember 7, 20198 min

On October 30, the Bank of Canada reported that it will continue to hold its policy interest rate (otherwise known as its “overnight interest rate”) at 1.75%—the same rate we’ve had since October 2018. The implications of this announcement are worth exploring, but here’s the quick and dirty conclusion: Canada is in “Keep Calm and Carry On” mode.

How does the Bank of Canada’s rate affect everyone?

There are eight fixed dates every year when the Bank announces whether it will change its rate of interest. According to the Bank’s schedule, we’ll receive the next (and final) announcement for 2019 on December 4. In simple terms, the Bank of Canada sets a target rate at which financial institutions borrow and lend one-day or “overnight” funds to each other. In turn, this rate affects the interest rates available to consumers (for things like mortgages and consumer loans) as financial institutions adapt to increases or decreases in their operating costs. Changes in the overnight interest rate can also impact the exchange rate of the Canadian dollar.

In essence, the Bank of Canada uses adjustments (or lack thereof) to its benchmark rate as a means of implementing monetary policy.

What are the implications of rates increasing or decreasing?

It’s tricky to predict the precise outcomes of rates increasing or decreasing—after all, they merely play a single (albeit powerful) part in the functioning of an economy. Rather than speculating on the range of scenarios that could play out, it’s worth looking at why the Bank of Canada increases or decreases rates in the first place

Simply put, the Bank increases its rate when it wants to slow down how much people spend, and lowers it when it wants to encourage spending.

For example, unchecked spending during periods of economic growth can cause aggressive inflation. By increasing interest rates, the Bank of Canada incentivizes saving money while also making it more expensive to borrow money. If all goes to plan, spending slows down and inflation decreases to a stable, predictable rate.

Conversely, during recessions or periods of economic hardship, people are more likely to put their money away and take on less debt. However, the economy needs people to spend and borrow money in order to stimulate business and encourage growth. To facilitate that, interest rates are lowered to make loans more affordable.

What does an unchanged interest rate indicate?

There’s a small, but important difference in how you look at this latest interest rate report: it’s not that the Bank of Canada has decided to keep interest rates the same—rather, it’s that it has decided not to raise interest rates at this time.

The answer to why the Bank has made that decision can be found on their own website: “Growth in Canada is expected to slow in the second half of this year to a rate below its potential. This reflects the uncertainty associated with trade conflicts, continuing adjustment in the energy sector, and the unwinding of temporary factors that boosted growth in the second quarter.”

In anticipation of economic uncertainty both globally and domestically, keeping rates stable is the most prudent course of action. Growth has slowed, not stopped altogether, so lowering rates is unnecessary at present. Moreover, if circumstances decline, raising rates would have an undesirable effect. It’s better to stay the course, wait, and see how things turn out.

What does this mean for you, as an individual?

The direct outcome is a degree of stability. Your personal finances won’t be affected greatly (or at all) for the moment. In terms of things like homeownership: for folks with variable rate mortgages, a steady interest rate means you’re not in for any surprises. Similarly, renters shouldn’t encounter any abnormal spikes in rental prices. I wouldn’t take this as an opportunity to rack up frivolous debt, but I wouldn’t shy away from any planned expenditure either. All of this might change come December, but as I said: the best we can do right now is to keep calm and carry on.

Jamie Quadros

Freelance writer and communications professional at the University of Toronto. He’s an avid cinephile, voracious reader, and a terror at karaoke bars.

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