As a horse remedy to counter inflation, the Bank of Canada raised yesterday, for the second time in a row, its key rate by 50 basis points (0.5%), which now stands at 1, 5%.
Worse still: more key rate hikes are on the way.
It must be said that inflation is currently very high. According to the Bank of Canada: “In Canada, inflation measured by the consumer price index (CPI) reached 6.8% in April – a rate that far exceeds the Bank’s forecasts – and is expected to continue. rise in the short term before starting to decline. »
The Bank of Canada aims to bring inflation back to around 2%. We are very far from the target!
CONSEQUENCES
The Bank of Canada’s credit crunch obviously affects the entire interest rate grid, from mortgages to personal loans, as well as affecting business loans and government borrowings.
Since the start of the year, the Bank of Canada’s key rate has gone from 0.25% to 1.50%, an increase of 1.25%. All borrowers see their bills for interest charges increase.
MORTGAGE EXAMPLE
Example for a mortgage loan with a term of 5 years: for each tranche of mortgage of 100,000 dollars amortized over 25 years, the monthly payment will thus have increased by approximately $66.20. Or $795 over a year.
This increase in mortgage payment is in addition to increases in interest charges on other borrowings.
Any interest charges of course affect the state of our personal finances.
The more one has “tight finances”, the more one risks dragging the devil by the tail.
Especially since the increase in the cost of money is added to a panoply of increases, including the soaring price of gasoline, the increase in the cost of the grocery basket, etc.
OUR WALLETS SCOP
When central banks such as the Bank of Canada and the US Federal Reserve (the Fed) raise their respective key rates, this generally has a negative impact on the stock market.
This is what has happened since the Bank of Canada and the Fed started raising their key rates this year.
But… of all the major stock market indices in the world, the Toronto Stock Exchange (S&P/TSX) barometer is the one that has done the best. After the first five months of the current year, it shows a decline of 2.3%. This is very low compared to 13% for the main American index, the S&P 500 of the New York Stock Exchange.
Where rising interest rates are hitting our portfolios hard is in fixed income securities, such as bonds, preferred stocks, fixed income-oriented mutual funds.
Since the beginning of this year, losses in this type of investment exceed 10% in many cases.
Explanation: when rates rise, the market value of bonds traded on the bond market falls (as is currently the case) and vice versa, when rates fall.
