[eli5] why does banks increase interest rates?


Today, bank of canada increased their interest rates by .5 percent. Being a dumb, what’s the reason behind it. How does it impact a common man in day to day spendings?

In: 1

Many people have mortgages, car loans, and other kinds of debt. When interest rates go up, the interest rates on those loans also go up. This (in theory) means that people have less money to spend, which slows down demand, which slows down or stops inflation.

It also had a huge adjustment on the stock market. and peoples investments. People close to retirement may not be able to recover in time. and have to work past their intended retirement date.

It has slowed down the housing market – causing housing prices to decrease in some cases from last month or YoY, and now people qualify for less for a mortgage.

Inflation makes everything go up because our dollar becomes less valuable and has less buying power in the world. Rising the interest in theory will slow inflation and strengthen our dollar, but it has put us into a recession.

If you are not feeling the effects of all of this, consider yourself privileged.

Simple answer because they can and to make more money. Longer answer normally for something like to fight inflation. Higher rates means less people will take those loans and therefore less spending on things people don’t need. On the other hand poorer people will often still need loans even with raised rates, so the higher rates will make more money for the banks. At the end of the day the main goal is for them to bring in more money.