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For some people, what the Bank of Canada (BoC) does, is over their heads

Interest, inflation, recession — what does that mean for the typical Victorian just trying to get by and save money?

The Bank of Canada’s latest announcement

On Wednesday morning, the BoC announced that it is once again raising interest rates to 4.5% — the highest it’s been in over 30 years. 

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This is all done in an effort to slow down inflation rates which have been plaguing Vancouver Islanders who already deal with higher prices than most of Canada in some areas. 

Victoria Buzz spoke to an instructor of economics from Camosun College, Keith Yacucha, and asked him to explain what the interest rates actually mean for people in Greater Victoria.

“The comparison I use often with my students is, it’s like going through chemotherapy,” said Yacucha.

“If you have cancer [inflation], it’s terrible, it’s going to do a lot of damage to your body. At the same time, treatment [increased interest rates], isn’t necessarily any more friendly.”

The newly increased interest rates will have a direct impact on Victorians, but only if they are currently in debt.

Higher interest rates effects on Victorians

People with ‘variable rate’ mortgages are affected because the increase in interest directly affects how much they need to pay to own their home. If interest rates are high, they’re paying more every month and they’re paying off their home for longer. 

However people who opt to get a ‘fixed rate’ mortgage, might be laughing right now because the increase won’t affect them—not right away at least. 

“Right now I don’t think locking into a fixed rate would be the best idea,” chuckled Yacucha. 

“If you have a mortgage and you’re paying it off over 25 years, every five years you have to go and renew that.”

“So if you’re going for a fixed rate, you’re only locking in for five years at a time so all those people who maybe locked into a nice low rate five years ago, they’re happy now but when they go into the bank for a renewal, they’ll renew at significantly higher rates.”

The same goes for people who owe money on their cars, lines of credit, student loans and anything else that puts someone in debt to a business or organization that also borrows money.

Everything in Canada trickles back upstream to the BoC. Banks like TD and RBC borrow money from the BoC, and people borrow money from them. 

So if the BoC is charging more interest to whatever bank people choose to bank with, Victorians can bet their bottom dollar that their banks will make them pay them back in full.

Are we approaching a recession?

Recession is what all of the efforts from the BoC are trying to avoid. 

If interest rates don’t go up, inflation will continue to rise and Canada will reach a point of recession which will then lead to the economy toppling.

Given the already record high prices for food and housing in BC, the consequences of a possible recession could affect British Columbians the most out of any province in Canada. 

If interest rates go up too much in an effort to reduce inflation, people will stop spending money, buying houses and indebting themselves which could also plummet Canada into a recession.

“You’re kind of damned if you do and damned if you don’t,” Yacucha told Victoria Buzz. 

“It’s trying to walk that line, trying to achieve what would often be referred to as that ‘soft landing.’”

“[The BoC] is trying to slow the economy down, bring those prices back in line, but try to do it as skilled as you can so you don’t tank the economy all together.”

What can help avoid recession?

One way to help curb all these issues is for people to be able to make more money which will increase their purchasing power. This will make the increasing interest rates have less effect on the consumer.

According to Yacucha, higher wages are the only cure to the current situation. He said that prices are not going to get cheaper anytime soon, in fact they’ll just continue to get more expensive.

“One of the main things I remind my students of is: yes the rate of inflation is going down, but it’s still a rate of inflation,” Yacucha said.

“So one way to think of that is, say we used to be driving down the road at 80 km/h, we’re now driving down the same road at 60 km/h, we’re still moving forward — that is prices are still rising.”

“Bread is still getting more expensive, apples are still getting more expensive, they’re just not getting more expensive as quickly as they used to.”

Canada is avoiding a recession for now, but it is still within the realm of possibility, given the thin line the BoC is walking between inflation and interest rates, with wages generally not increasing enough to combat the additional costs Canadians face.

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