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What are central banks doing to combat inflation?

Central banks all around the world have been raising interest rates throughout the year in order to bring the rate of inflation down to more manageable levels. In Canada and the United States, these rate hikes have been rolled out much faster and more frequently than most people have ever experienced. On September 7th 2022, Bank of Canada Governor Tiff Macklem and on September 21st Jerome Powell, Chair of the Federal Reserve of the United States, both unveiled an interest rate increases of 75 basis points, while indicating that more are likely on the way.

If recent news reports like these have you feeling unsure of what to expect next, don’t worry. This articles is here to help you understand where the Canadian economy is headed and why. We’ll break down what’s going on, why it’s happening, how it affects you, and what could come next.

Why are rates continuing to rise?

Central banks are increasing overnight interest rates on loans in order to try to decrease the rate of inflation. This causes interest rates on just about everything else to rise, too. (You can learn more about how this process works here.)

Interest rate increases are the most powerful tools central banks have in their fight against inflation. Canada and the United States have used these tools multiple times this year. However, The Bank of Canada’s fight against inflation has been especially tricky post-pandemic. Many economic issues remain that continue to drive inflation in Canada, including the rising costs of energy (including gas for your car) and food, along with ongoing global supply chain problems. These issues are so complex that the Bank of Canada has to be very careful about the way they increase interest rates. If they don’t raise interest rates quickly enough, the rate of inflation will soar. If they raise interest rates too quickly, the economy could fall into a recession.

The good news is that their efforts might be starting to pay off. In Canada, the annual rate of inflation has come down somewhat from a peak of 7.6%, while the annual rate of inflation in the US is hovering at multi-year highs of just over 8% but has stopped rising.

That doesn’t mean the Bank of Canada’s finished raising interest rates. Canadians are still feeling the effects of inflation in just about every aspect of their lives, which means there’s likely still work to be done.

How does inflation impact Canadians?

Canadians can feel the effects of inflation in a variety of positive and negative ways.

Inflation makes borrowing more expensive, and saving more difficult. If you live on a fixed income, high rate of inflation can affect your ability to save money. Though you might be making the same amount of money as you did a year ago, regular purchases, including gas and groceries, get more expensive in relative terms. Inflation eats away at your earnings and makes them less valuable overall. The more money you spend on gas, groceries, and other essentials, the less you have left over for other goals and purchases. As a result, setting aside money for the future becomes more difficult.

Central bank responses of increasing Fed Fund rates to fight Inflation also causes lending rates on our loans, mortgages, and lines of credit to increase, making debt repayment harder. Carrying debt becomes more difficult, and this affects borrowing decisions. For example, a lot of Canadians have mortgage terms that are set to mature soon. They’ll likely be paying a much greater interest rate if they choose to renew their mortgage. Meanwhile, Canadians with variable rate mortgages will find that more and more of their payments go towards interest and less towards principal payments, slowing down the rate at which they pay off their mortgage. They might choose to switch to a fixed rate mortgage that offers more consistent repayments of interest and principal.

While these interest rate increases make borrowing more expensive, they can help you earn more on the cash you keep in savings accounts and GICs. But it’s also important to keep these increases in perspective. Rates on savings accounts and GICs don’t yet match the rate of inflation. If you use your savings account or GICs as the main way of reaching your financial goals, even with a rise in interest rates, the rate of inflation will still make achieving your financial goals more difficult.

What should we expect?

Interest rates are expected to continue to rise over the next 16 months. The rate of inflation may start to level out, but it probably won’t drop to more manageable levels of 2-3% for some time. Ongoing concerns about inflation will cause uncertainty about the future of the economy, which will keep investors worried and the stock market volatile. In the long-term stock markets have proven resilient to many economic and interest rate moves and we would expect to see them recover.

We can help

Everyone’s financial situation is unique. The financial advice you receive should be unique, too. If you’re concerned about how inflation and rising interest rates can or will affect your financial plans, speak with a Coast Capital advisor. We’ll take the time to understand your unique needs and goals, and help you craft a plan for achieving them. Visit a Coast Capital branch or call us at 1.888.517.7000.


The stuff we have to say.
Coast Capital Savings Federal Credit Union provides advice and service related to deposit, loan and mortgage products.  Only deposits held in Canadian currency, having a term of five years or less and payable in Canada are eligible to be insured under the Canada Deposit Insurance Corporation Act.  Coast Capital Wealth Management Ltd provides investment and financial planning services. Coast Capital Financial Management Ltd. provides advice and service related to segregated funds, annuities and life insurance products. Worldsource Financial Management Inc. provides advice and service relating to mutual funds. Mutual fund values change frequently and past performance may not be repeated. Commissions, trailing commissions, management fees and expenses may all be related with mutual fund investments. Important information about mutual funds is contained in the relevant fund facts and simplified prospectus. Please read the fund facts carefully before investing.
This article is provided for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, fees, and other investment factors are subject to change without notice and Cost Capital Savings Federal Credit Union is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and Coast Capital Savings Federal Credit Union does not guarantee accuracy or reliability of such sources. Readers should consult their own professional advisor for specific financial, investment, and tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.

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