November 14, 2022

Rising Interest Rates: How Do You Adapt?

Despite signs of an economic recession, Bank of Canada Governor Tiff Macklem believes that further interest rate increases will be necessary to reduce inflation. But how will this affect the way you save and borrow? Read this article to find out how this increase will affect your cost of living and your budget.


1. Why Is Inflation So High?

The Canadian economy is currently in a state where demand is far outpacing supply. This situation, combined with world events such as the COVID-19 pandemic and the Russian invasion of Ukraine, could partially explain the high inflation. For reference, inflation reached 8.1 per cent in June and then fell to 7.0 per cent in August[1].

Furthermore, according to Tiff Macklem, the pent-up demand for certain sectors during the pandemic, such as travel, leisure, and restaurants, may have contributed to higher prices when the economy fully reopened.

2. Is Canada Entering a Recession?

Slowed by rising interest rates, the Canadian economy could enter a period of mild to moderate recession. If this is the case, the Bank of Canada’s objective would be to restore a low and stable inflation rate, without triggering too serious an economic slowdown.

3. Are We Facing a Historic Increase?

Since March 2022, the Bank of Canada has raised its policy rate five times, from 0.25 per cent to 3.25 per cent, one of the faster cycles in its history[2]. However, the situation could continue due to the tight labour markets, an economy where demand still outpaces supply and inflation remains high.

4. What Is the Potential Impact on Your Portfolio?

The Bank of Canada will also be monitoring the expectations of individuals and businesses as inflation takes hold. If these expectations are high, companies may set prices even higher, and workers may demand higher wages. Consequently, high inflation would create uncertainty and inequality, and distort decision-making by directly impacting confidence. In that regard, rising interest rates have already had an impact on the housing market, which has cooled considerably.

5. What Does a Rise in Interest Rates Mean for Homeowners?

Faced with rising interest rates, consumers will have no choice but to rethink how they spend and save their money, but also how they borrow. As a homeowner - or future homeowner - this increase has a direct impact on a mortgage or line of credit, but more importantly, on the ability to repay a loan[3].

For homeowners with a variable rate mortgage, this increase will be felt faster since their payments will increase at the same rate as the interest rate. Conversely, those with a fixed-rate mortgage will only feel the impact when they renew.

6. How Do You Manage Your Budget?

Do you want to minimize the impact of inflation on your portfolio? Here are a few steps that will make it easier for you to do so:

  • Review your budget to adjust it to the new prices.
  • Pay off high-interest debt such as credit cards first.
  • Keep an eye on your variable rate loans.
  • Review your investment strategies based on the available returns.

Inflation, interest rates, price increases: the economy goes through many different cycles that affect the lives of consumers and businesses. Even if the situation may sometimes seem complex or delay your first property purchase, it is nonetheless ephemeral. Our best advice for dealing with it confidently: keep an eye out for the latest developments.


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