Bank of Canada’s Third Interest Rate Hike in 2022: What Does This Mean for You?

There’s a lot going on with the Canadian economy right now, such as rising inflation, supply chain issues for consumer goods and housing affordability challenges. If you have personal debt or a mortgage, chances are you’ve been watching interest rates closely. 

This week, the Bank of Canada raised interest rates for the third time this year by 0.5% to 1.5%, a level not experienced since prior to the pandemic in early 2022.

So what might the recent rate hike mean for you? Let’s take a look.

Why did the Bank of Canada raise interest rates?

On Wednesday, June 1, the Bank of Canada announced an interest rate hike of 0.5%, taking the benchmark rate to 1.5% and representing the third rate increase this year. The most recent rate increase was in April, with a hike of 0.5%. Before that in March, the Bank of Canada had raised the rate by 0.25 percentage points to 0.5%, which was the first rate hike since 2018.

A key reason for the interest rate hike is to combat rising inflation. Since the beginning of the pandemic, Canadians have seen inflation go up to 6.8% – the highest it’s been in more than 30 years and more than twice the level that the central bank likes to see. 

Despite three hikes this year already, the Bank of Canada has signalled that Canadians shouldn’t expect the interest rate to go down anytime soon. “With inflation persisting well above target and expected to move higher in the near term, the bank continues to judge that interest rates will need to rise further,” the Bank of Canada said in a recent statement. Consumers can look for a break from inflation closer to the end of the year or, more likely, into 2023.

Which types of credit products will be affected by this interest rate change?

Bank of Canada interest rate changes will impact any debt that uses the prime interest rate to determine the interest rate you pay on the loan, such as lines of credit, home equity lines of credit (HELOCs) and variable rate mortgages. With the rate increases from the Bank of Canada this year, consumers with these products would have seen the amount of interest they pay increase and possibly higher payment amounts.

One of the best ways to try and get the lowest interest rates on products like lines of credit or mortgages is by having a high credit score. A credit score of at least 680 signals to lenders that you can be trusted with credit so they can be more confident in lending to you, meaning they’ll likely offer you lower rates. If you don’t know your credit score, you can access it for free through Borrowell.

What types of credit products won’t be affected?

Fixed-rate loan products, which generally include credit cards and installment loans, as well as fixed-rate mortgages, won’t be impacted by Bank of Canada rate changes. However, rates when applying for new loans and mortgages may be impacted. 

How to prepare for future interest rate hikes

With more rate hikes on the horizon, it’s best to plan ahead. Things you can do include paying down your high-interest debt, planning for the possibility of higher payments towards loans or mortgage payments, and making sure you’re contributing to an emergency fund in a high-interest savings account. One benefit of the Bank of Canada interest rate increases is that the interest rates on your savings will have also risen.