Economic Factors that Affect Your Finances
There are many economic factors that can affect your finances, for example, inflation. Earlier this year the inflation rate in Canada went from 1.7% to 2.4% during the first quarter. This was mentioned in our previous blog, “Inflation Rate, What You Need to Know.”
When inflation rate starts to rise, lenders understand that they will receive less money then what they initially invested. As a result, they will try to increase their interest rates to balance out the loss they receive through the inflation rate rising.
Another economic factor to consider is the Bank of Canada. The Bank of Canada is responsible for setting national monetary policies and supervising banking operations.
When the economy starts to do very well, there is a fear that the inflation rate will go up. In response, the Bank of Canada will try to increase its interest rate to decrease loans. In contrast, when the economy starts to fail, the Bank of Canada will lower interest rate to try and encourage spending.
Interest Rates & Investments
With Canada’s economy in stable condition, the Bank of Canada plans to increase its interest rate once again this year. This increase can affect variable rate mortgages and lines of credit by increasing monthly payments. We mentioned this before in our previous blog, “Canada’s interest rate and what to expect.”
There is another way rising interest rates can affect you, or rather, affect your investment portfolio. With interest rates increasing, certain investments will be affected, like real estate investment trusts (REIT’s) and utilities. The reason being that REIT’s and utilities usually carry more debt, that becomes more expensive as interest rates move rise.
In addition, investors need to be weary of the public companies they invest in. Investors will need to understand the difference between the successful companies and those that benefit from low interest rates. If interest rates rise, a company that relies on borrowing money, might be forced to spend more money servicing its loans.
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