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How Canadians can protect themselves against rising interest rates

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Rising interest rates are creating concern and worry among financially vulnerable Canadians. Increasing interest rates to meet the challenge of rising inflation have left millions spending more monthly to service their debts.

Approximately 59% of Canadians say they are concerned about the effect of interest rates on their finances, as the Bank of Canada has initiated its sixth hike of the year so far, to reach 3.75%.

Canadians can take action to shield themselves from rising interest rates. Here’s your guide on how to do it.

 

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Reduce your expenses

The number one piece of advice is to reduce your expenses. Unfortunately, rising interest rates are coupled with high inflation and a cost-of-living crisis. Even middle-class Canadians are finding their budgets squeezed by rising costs.

Reduce your expenses by creating a budget and thinking about where you can make cuts to luxuries. Freeing up some funds now can enable you to meet future interest rate rises and allow you to service your debts or even cope with the loss of a job.

Pay down high-interest debts

Unless you happen to have a loan with a fixed interest rate, the chances are good that you have already noticed that your monthly repayments are rising – or are set to rise.

Concentrate on paying down the debts with the highest interest rates first. For most Canadians, this will be credit card debt, which can reach double-digit interest rates.

Make the minimum monthly repayments on other debts while overpaying on those higher-rate loans to avoid becoming overwhelmed.

Debt consolidation may also be an option. For example, consolidating debt from multiple credit cards can save you money by combining all your individual loans into a loan with a lower interest rate.

Note that debt consolidation isn’t for everybody. Use a loan consolidation calculator online to figure out whether you could save money by going through this process.

Create an additional stream of income

Work on reducing your exposure to rising prices by increasing the monetary resources you have available.

Many Canadians are choosing to trade on the forex markets to take advantage of volatile exchange rates between the Canadian dollar and other major currencies. Sign up for a reliable, locally regulated broker, who will use solutions like the Metatrader 5 platform to help start your journey.

Trading in foreign currencies has the dual benefit of hedging your exposure to currency depreciation while enabling you to potentially make a profit.

Note that all investments have a chance of losing money, so make sure you’re only investing money you can afford to lose.

Don’t take on new debt

Now is not the time to take on new debt. Fewer lenders are offering fixed-interest rate loans because of how quickly interest rates are rising. Getting stuck with a large variable-rate loan can mean paying far more than you intended in the years to come.

There are no guarantees that interest rates won’t continue to soar in 2022 and 2023. The markets already widely expect a further 50-point hike in the Bank of Canada’s interest rate before the end of the year.

If possible, try to avoid adding to your debt burden for the foreseeable future. Instead, focus on taking advantage of a high-interest ecosystem by saving for the future.

Create an emergency fund

The Bank of Canada entered the spotlight this week when its independence and role were questioned. While nobody should expect a significant change in the national bank’s position in the near future, politicians are looking for the bank to prioritize protecting jobs.

With a recession likely on the horizon, job losses are possible across Canada. With businesses finding it more expensive to access financing, it’s not inconceivable that cuts could be made to personnel if the economic situation deteriorates.

Smart Canadians will plan for every possibility. Work on creating an emergency fund that can allow you to survive for at least six months if the worst should happen.

Your emergency fund can also help manage unexpected expenses and cover higher loan repayments to avoid penalties and a hit to your credit score.

Conclusion

Rising interest rates may benefit savers, but anyone who is paying down debt will struggle to cope with the rapid increases in the base rate. Rampant inflation is also exacerbating the cost-of-living crisis and making it harder for Canadians to grow and thrive.

Preparing for the worst-case scenario of an economic crash is not paranoid but prudent. Plan for the worst and hope for the best to help you and your family negotiate troubled economic waters.

What are you doing to defend yourself against rising interest rates?

Economy

Russia is pushing its central bank to give 'upbeat' economic updates – Business Insider

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Russia is pushing its central bank to give ‘upbeat’ economic updates  Business Insider

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Biden highlights economy, spars with Republicans in State of the Union speech – Global News

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Given high inflation, slowdown in Canada’s economy is ‘a good thing,’ Tiff Macklem says

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Bank of Canada governor Tiff Macklem says that although a slowing economy may not seem like a good thing, it is when the economy is overheated.

Speaking in Quebec City on Tuesday, Macklem said that higher interest rates are working to cool the economy as elevated borrowing costs are constraining spending on big-ticket items such as vehicles, furniture and appliances.

As demand for goods and services falls, Macklem says the economy will continue to slow.

“That doesn’t sound like a good thing, but when the economy is overheated, it is,” he said.

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In addition to global events, the overheated domestic economy pushed up prices rapidly, he said.

To slow the economy domestically, the Bank of Canada has embarked on one of the fastest monetary policy tightening cycles in its history. It has hiked its key interest rate eight consecutive times since March, bringing it from near-zero to 4.5 per cent.

However, last month, the Bank of Canada said it will take a “conditional” pause to assess the effects of higher interest rates on the economy.

“Typically, we don’t see the full effects of changes in our overnight rate for 18 to 24 months,” Macklem said on Tuesday.

“In other words, we shouldn’t keep raising rates until inflation is back to two per cent.”

However, the governor said the Bank of Canada will be ready to raise rates further if inflation proves to be more stubborn than expected.

Bank of Canada hikes interest rates again to 4.5%

The Bank of Canada is raising interest rates again, bumping it to 4.5 per cent. This marks the eighth increase in less than a year, leaving some homeowners scrambling to keep their mortgages.

As gas prices have fallen and supply chains have improved, inflation in Canada has slowed since peaking at 8.1 per cent in the summer. Macklem called this a “welcome development,” but stressed inflation is still too high.

“If new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further,” Macklem said.

For inflation to get back to two per cent, Macklem said wage growth will have to slow, along with other prices.

Wage gains lagging inflation

Wages have been growing rapidly for months but continue to lag the rate of inflation. In December, wages were up 5.1 per cent.

Though annual inflation is still at decades-high levels, economists have been encouraged by a more noticeable slowdown in price growth over recent months.

The Bank of Canada forecasts the annual inflation rate will fall to three per cent by mid-year and to two per cent in 2024.

Royce Mendes, an economist with Desjardins, said that Macklem is crossing his fingers that the rate hikes he has implemented so far will be enough to get it done.

“The head of the Bank of Canada seems quite comfortable sitting on the sidelines even as his U.S. counterpart will be discussing the need for further monetary tightening south of the border,” Mendes said.

 

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