Steinbach Credit Union is following the Bank of Canada's lead and is raising its interest rates.
The Bank of Canada announced this morning that it has raised its key interest rate by a quarter of a percentage point, bringing it to five per cent. Glenn Friesen, Chief Executive Officer for Steinbach Credit Union says they will be raising by the same quarter point.
"We pretty much have to because that is what all of our competitors do as well," explains Friesen. "So they are continuing to increase the cost of borrowing in an attempt to slow growth, which hopefully will slow inflation, according to them."
To put this into perspective, Friesen says for every $100,000 worth of debt, you will now pay an additional $250 per year in interest. He notes for most people that might not mean a whole lot. However, Friesen says when you look at the cumulative effect of interest rates going up by a total of 4.75 per cent over the last couple of years, that works out to an additional $4,750 per year for every $100,000 worth of debt.
"That adds up quite a bit," he says. "That's over $400 a month for most people."
Friesen says Steinbach Credit Union's prime rate was 6.95 per cent and is jumping to 7.2 per cent. The variable savings rate will also go up, but Friesen says it probably will not be going up by a quarter point. The reason for that is because on the way down, they did not drop these rates at the same pace as the loan side. Currently, Steinbach Credit Union's personal high interest savings account starts at 3.65 per cent.
Friesen says it sounds as though the Bank of Canada would like to raise interest rates at least one more time before the end of the year. He notes the interest rate increases comprise about one-third of the actual overall inflation. So, if our inflation is currently at 3.4 per cent, Friesen says about one-third of that is caused by increased interest rates.
"So, they are actually adding to their own inflation," he explains. "It's kind of weird because they are trying to reduce inflation, but they are also causing it."
Friesen says he understands that they need to get inflation under control. But he explains that interest is a lagging indicator in that it takes a long time for it to actually slow down the economy.
"Hopefully they are not moving too fast," he says. "I don't have that crystal ball either, I hope that we do actually have that soft landing that they keep hoping for."
For those whose mortgage is up for renewal, Friesen says SCU will work with every individual. He says they will do their best to help all members.
"Those who are struggling with these increased interest rates, we also work with them to try and make the best of the situation that neither one of us has any control over," says Friesen.
Without knowing what the future holds, Friesen says if Canada falls into a recession, interest rates will drop. If we hit a soft landing, he says interest rates might lower a little bit. Having said that, Friesen says he would love to see interest rates stabilize in that three to five per cent range.
"I think that would be good for borrowers, it would be good for savers," he explains.
Friesen says if our inflation rate was around two to 2.5 per cent, then having the Bank of Canada interest rate at three to four per cent would be very acceptable.
"The last three to four years have not been a fun ride with interest rates," he notes.