Inflation is a natural part of a healthy economy, but if it rises too quickly, it can become problematic. When inflation increases rapidly, everyone tries to raise their prices to keep up, which can cause the value of the currency to plummet. This can lead to a recession and, in some extreme cases, currencies have become completely worthless.
To prevent this from happening, the Bank of Canada (BoC) has a mandate to keep inflation at a target rate of 2% per year. It does this by setting a target for the overnight rate, which is the cost for banks to borrow money from each other overnight. When the overnight rate increases, banks raise their interest rates to cover their costs.
As a result, people are less likely to borrow money, which reduces spending and encourages saving. This creates downward pressure on prices and helps to slow the rate of inflation.
If you have a variable-rate mortgage, you may have noticed that your monthly payment has increased due to the higher cost of borrowing. As interest rates continue to rise, your mortgage payment will keep increasing each month to match your new rate. Although the higher mortgage payment can be a burden, you are still paying less than you would with a fixed-rate mortgage. However, as interest rates have increased throughout 2022, this is currently not the case.
If you have a fixed-rate mortgage, you do not need to worry until your mortgage is up for renewal. However, you are likely to pay more than you are currently paying when the time comes.
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