Question

Why did the Bank of Canada make the decision to raise interest rates by 0.25% in 2017? What are the likely effects? Consider different stakeholders

Answer 1

The Bank of Canada raised its overnight lending rate by a quarter percentage point to 0.75 percent from 0.5 percent, citing "bolstered" confidence that the Canadian economy has emerged from years of sputtering growth. Canada's largest banks matched the central bank's move by raising their prime rates effects by a percentage point to 2.95 percent. Consequently, this influence the cost of borrowings on floating-rate loans, variable rates mortgage, student loans, education loans, credit lines.

The certain reasons to raise this rates were:-

Ultra-low interest rates have encouraged Canadians to load up on mortgage debt in their past recent years, driving home prices and home constructions particularly in and around Toronto & Vancouver. This action could stabilizes the housing costs because the more interest a person has to pay when he/she borrows, the less he/she can borrow.

Higher Interest rates were needed to reduce the vulnerability of high households indebtness and real estate price imbalances in part of the country. But they had also penalized savers and made tough for pension funds to generate healthy funds. Higher rates will help to cool the housing market and rein in debt-fuelled purchases of vehicles and other consumer related items.

One of reasons for Bank of Canada was that inflation was low and falling. Central bankers typically raise their rates to keep inflation checks. That was also a probable reason for raising the interest rates. The bank expected consumer spending, exports and business investments to drive growth in the months ahead after raising interest rates.  

The Central Bank raised the rates as it want to protect Canada & Canadians from economic upheaval. Encouraging the people to not to borrow more than they can comfortably afford was extremely important for healthy and stable economy.

Some of its other of its impacts which occurred as a result of raising interest rates were:- When rates went up and budget of a household get so tight that they started falling behind with their payments, then the lenders were most probable to impose any number of consequences upon borrowers. For Example:- When we miss payments of credit card. the interest which it attracts, trigger an increase. If during the year, people were able to make only minimum payments, they put their credit score in jeopardy. A decreased credit score can impact the ability to renew and/or renegotiate the mortgage at the most attractive interest rates.