How will a policy interest rate hike or cut impact my finances?

06 June 2024 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.

Can I finance my renovations using my mortgage?

We're here to answer your questions.
Even from a distance.

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 over the past years are intended to continue efforts to counter rising inflation rates.

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.

Pictogramme ampoule qui s’allume

Good news: the policy interest rate has decreased by 0.25%! If you’re thinking about buying a property, we recommend prioritizing your healthy financial habits. Keep in mind that, even with a decrease, we’re still in a restrictive context, and we can’t put a price on peace of mind. It’s with a solid financial foundation that we can confidently realize our projects.

Here are some ways to counter the impact of rising policy interest rates and inflation on your finances:

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

In a restrictive context, 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. 

Discover our advices to elect the best investing strategy for you.


Legal disclaimer

Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank of Canada.

The articles and information on this website are protected by the copyright laws in effect in Canada or other countries, as applicable. The copyrights on the articles and information belong to the National Bank of Canada or other persons. Any reproduction, redistribution, electronic communication, including indirectly via a hyperlink, in whole or in part, of these articles and information and any other use thereof that is not explicitly authorized is prohibited without the prior written consent of the copyright owner.

The contents of this website must not be interpreted, considered or used as if it were financial, legal, fiscal, or other advice. National Bank and its partners in contents will not be liable for any damages that you may incur from such use.

This article is provided by National Bank, its subsidiaries and group entities for information purposes only, and creates no legal or contractual obligation for National Bank, its subsidiaries and group entities. The details of this service offering and the conditions herein are subject to change.

The hyperlinks in this article may redirect to external websites not administered by National Bank. The Bank cannot be held liable for the content of external websites or any damages caused by their use.

Views expressed in this article are those of the person being interviewed. They do not necessarily reflect the opinions of National Bank or its subsidiaries. For financial or business advice, please consult your National Bank advisor, financial planner or an industry professional (e.g., accountant, tax specialist or lawyer).