As expected, the Bank of Canada left its benchmark rate at 1% in its most recent announcement. However, following the decision, Mark Carney, the Governor of the BOC, made a rather upbeat statement about the Canadian economy -- and the possibility of an interest rate hike.
While Carney wouldn't commit to a precise timeline, the upbeat global economic forecast (the IMF just announced an improved forecast for the world economy for 2012), and the idea that the Canadian economy is looking stronger, are both combining to indicate that it might be time to tighten monetary policy by raising rates. Are you ready for an interest rate hike?
Higher Interest Rates Could be on the Way
If the Bank of Canada raises its benchmark rate, it is likely to affect you as a consumer. For borrowers, it means that loans will cost more. If you are in debt, now is a good time to pay down what debt you can. That way, more of your payment goes to principal, and actual debt reduction. If you wait, then you will automatically pay more in interest if rates rise.
Another way to save is to carefully plan your purchases right now. While you don't want to borrow money just for the sake of borrowing, now might be a time to make some of the larger planned purchases you have been considering. Now just might be the time to borrow smart. Lock in a lower rate now, rather than borrowing later when you will have to pay now.
Savers Could See Better Rates
For savers, a higher interest rate might not be such a bad thing. After all, it means that you will get more for your money. Higher rates generally benefit savers, who are looking for yield on their capital.
Even though it might be exciting to see higher yields on cash products, it's important to realise that any increases in the near future aren't likely to be very big. Even if the Bank of Canada raises rates by the end of the year, we'll still be a far cry away from the days before the financial crash of 2008 when some banks were paying 4% on deposits.
Watch Out for Inflation
An interest rate hike doesn't cause inflation; rather, the interest rate hike is often the result of inflation. When inflation is on the rise (usually caused by a growing economy), higher interest rates can slow things down. If Carney and the rest of the policymakers at the Bank of Canada believe that inflation is on the rise -- and that it will be spurred along by economic growth -- an interest rate hike could be coming.
The coming months should be interesting. Now is the time to consider your finances and figure out what could impact your money moving forward. If the IMF and Mark Carney are right, we could see better oil prices and higher stocks, as well as higher interest rates. Now is the time to re-position, whether you decide to pay down your Canadian credit card debt, or borrow smart, or prepare more capital to take advantage of more opportunities, and see what happens.