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Canada Interest Rates

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Interest Rates

Interest rates are an important link between the current and future state of the economy. High interest rates are often associated with negative effects on economic growth prospects, and can affect the economy in the following ways:

  • Raise the cost of capital for business investments. Higher interest rates can reduce the possibility of profitable investments, and in turn, reduce business investment.
  • Discourage consumers from spending. High rates increases the cost of borrowing. This is especially true for major goods like cars and furniture on credit. This may encourage consumer to save more and spend less.
  • Increase the portion of household income needed to service debt (such as mortgage payments). This reduces the income available to spend on other items.

Of course, the effects of lower interest rates are the opposite to the cases above, and can provide a positive environment for economic growth. It is also important to understand how interest rates affect bonds. There is an inverse relationship between bond prices and interest rates. This means typically as interest rates rise, bond prices fall, and as interest rates fall, bond prices rise.

Bank Rate: The bank rate is the minimum rate at which the central bank will lend money to domestic banks.

Overnight Rate: The interest rate set in the overnight market in which financial institutions lend each other money on an overnight basis. It is the lowest available interest rate and available only to the most creditworthy institutions. As the overnight rate is influenced by the central bank, it can be used as a good predictor for the movement of short-term interest rates for consumers in the broader economy. It is also a good indicator of the health of a country’s overall economy and banking system.

Contains information licensed under the Open Government Licence – Canada.