Don't add to your debt, economics professor advises consumers

The Bank of Canada raised its key interest rate to 0.75 per cent this week, but what does it mean for ordinary Canadian?

If economy continues to do well, interest rates may keep going up, says Murshed Chowdhury

The Bank of Canada increased the interest rate to 0.75 per cent earlier this week. (Chris Wattie/Reuters)

The Bank of Canada raised its key interest rate to 0.75 per cent this week, but what does it mean for ordinary Canadian?

Murshed Chowdhury, an associate professor of economics at the University of New Brunswick, says every year the Bank of Canada decides what it will do with the rate, known by other names, including the policy rate and the overnight rate.

The bank revisits the interest rate issue throughout the year based on the economy, he said.

All other interest rates depend on where the rate sits, which means the cost of loans such as lines of credit, mortgage rates, credit card rates, and car loans can be affected.

All interest rates are affected by the policy interest rate set by the Bank of Canada. ((David Zalubowski/Associated Press))

Chowdhury said the effect on consumers will depend on whether the Bank of Canada continues to raise the rate.

"A whole bunch of other interest rates are expected to rise when the policy interest rate rises," he said.

Industry experts said the increase the Bank of Canada announced on Wednesday could just be the beginning.

"I think it's the Bank of Canada having confidence that the breadth and durability of the expansion in Canada can sustain these small increases in interest rates," said RBC chief economist Craig Wright.

The Bank of Canada will revisit the rate again in September or October.

According to Chowdhury, variable rates will increase. Most fixed rates will hold but eventually will change as well.

What can Canadians do

He said if the rate doesn't increase again in the next eight months, there will be little effect on those who hold debt already.

Management of the debt should stay the same. 

"If I'm interested in buying a house, whatever the interest rate was earlier, as the policy rate increases that is expected to increase my mortgage rate," Chowdhury said.

Mortgage rates and interest rates on credit cards and car loans that are on variable rates will likely increase.

"If you have too much debt, it's definitely not good," he said. "If your debt is not in line with your assets, then it's not good."

The rate increase by the Bank of Canada will mean Canadians will pay more for loans, so UNB economics professor Murshed Chowdhury suggests they not take on more debt. (Darren Calabrese/Canadian Press)

To avoid the impact of the increased interest rate, the advice is simple, Chowdhury said: Do not create any further debt.

"It also depends on how the economy is performing, if the economy continues to do well, as it is right now, you may see that interest rate is hiking further."

He said Canadians should not see gloom projected by the higher interest rate. Instead, they should see the new rate as something the economy will benefit from.

Consumer response should be about managing debt and avoiding accumulating more.

"We need to be cautious," he said. "And look forward."

With files from CBC News