The recent increase in the Bank of Canada鈥檚 interest rate is going to have some far-reaching effects.
On June 7, in an effort to curb inflation, the central bank increased its interest rate. The key interest rate is now 4.75 per cent, up from 4.5 per cent.
This is the bank鈥檚 highest interest rate since 2001. At that time, interest rates were on a downward trajectory. This time, the trend is in the opposite direction.
The Bank of Canada鈥檚 concerns about limiting inflation are justified. Last year, the rate of inflation in Canada reached 8.1 per cent, leading to concerns about the effects of rising prices on household budgets. Few wage earners saw their take-home pay increase by the same amount as the rate of inflation.
This year, Canada鈥檚 rate of inflation is significantly lower at 4.4 per cent, but it is still well above the Bank of Canada鈥檚 target rate of two per cent.
For individuals and families living on tight budgets, even a slight increase to the rate of inflation can be uncomfortable. If finances are limited, any price increase may mean difficult decisions. Suggestions such as tightening the belt or doing away with luxury purchases do not help when budgets have already been stretched thin.
At the same time, a rise in interest rates will also have an effect, especially on those looking to buy homes or those who have mortgages up for renewal. The interest rate affects the amount one can borrow and the amount of one鈥檚 mortgage payments.
In short, there is no simple fix.
Although inflation and rising interest rates are concerns, things could be worse. In the United States, the rate of inflation in April, 2023 was 4.9 per cent. In the United Kingdom, the rate of inflation is considerably higher than in Canada or the United States, approaching nine per cent.
And a few decades ago, Canadians were struggling with the impact of inflation and high interest rates. In 1981, the Bank of Canada rate topped 21 per cent and the prime lending rate reached 22.75 per cent. These high rates were done as an anti-inflation measure, but the effects still had significant effects on household finances and on businesses.
Taking measures now may help to combat rising inflation.
Still, these changes will have effects on us all.
鈥� Black Press
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