Photo by Kiki Hood
An interest rate is the rate that is charged or paid for the use of money. Interest rates are usually expressed as a percentage of the principal over the period of one year. There are two main types of interest rates, nominal and real.
Nominal interest rate refers to the rate of interest before adjustment for inflation and represents amounts paid or earned; real interest rate adjusts nominal value to remove the effects of price changes over time and represents purchasing power of any price changes over time. There are also effective interest rates that correct nominal rates into annual compound interest so they are comparable. We will analyze immediate interest rate, which is also called Interbank rate since it is usually set by national bank.
How is it Calculated?
Interest rates are set either by national governments or central banks and their value is influenced by several variables like inflation, investment, and unemployment. Real interest rates are measured as the difference between nominal interest rates and inflation.
Interest Rates and the Housing Market
Interest rates have as strong an effect on the value of income-producing real estate as on any investment vehicle. They affect mortgage rates, capital flows, and the supply and demand for required rates of return on investment. According to Robert Stammers, an independent consultant providing investment and marketing support to business owners and private investors, many small homeowners focus only on mortgage rates because they have a direct influence on real estate prices, but interest rates also influence the supply and demand for property that affects home prices as well. Usually, when interest rates fall, real estate prices increase.
Interest Rate in Canada
In Canada, the Bank of Canada’s Governing Council makes all the decisions about interest rates. The official interest rate is the Bank Rate. Since 1996, the Bank Rate is set at the upper limit of an operating band for the money market overnight rate.
From January 2009 to May 2010, the Canadian interest rate was falling, and since September of last year, it has remained at 1%. Last year’s interest rate is among the lowest in OECD countries.
Interest Rate Today
The Bank of Canada announced on April 12, 2011 that it will maintain its target for the overnight rate at 1%. “This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of material excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered,“ stated the Bank of Canada.
It is hard to predict interest rates, and forecasts should be used only as a rough tool because they have considerable margins of error. Here, you can find a graph of the latest year-end interest rate projections from Canada’s biggest banks.