The Bank of Canada held its key interest rate at 0.25 per cent in a closely watched decision Wednesday, but signalled that borrowing costs will rise in the year ahead.

Governor Tiff Macklem said “Canadians should expect a rising path for interest rates” in 2022, as inflation has reached its highest level in decades. Here’s what you need to know:

Why it matters: Low interest rates have persisted for more than a decade, with Canada’s overnight rate remaining below two per cent since the 2009 financial crisis. While Wednesday’s plans may not spell the end of the current era of low-cost capital, even a gradual increase in rates will alter investment strategies and company operations. 

What does this mean for business investment?: According to the BoC’s latest survey of business owners, many companies still plan to boost investment this year, despite an expected rise in rates. That would follow tepid business investment levels last year in areas like machinery and software.

“Overall during the pandemic, business investment has been pretty weak,” Stephen Tapp, chief economist at the Canadian Chamber of Commerce, told The Logic. But that is likely to change as pandemic restrictions are lifted and demand rises, he said. 

“Firms are going to need to invest in general, so the fact that they’re paying a little bit more to borrow over the short term is probably not going to dissuade them from doing that.”

Will stock markets feel the ripple effects?: Equity markets have already been on a wild ride in recent days, and that could continue as inflation worries loom.

“We’re likely going to face a period of heightened volatility over the next year at least,” Rebekah Young, director of fiscal and provincial economics at Scotiabank, told The Logic in an interview.

Young said the current volatility is partly a “perfect storm” of geopolitical uncertainty, a wilting enthusiasm for tech stocks, concerns over interest-rate hikes and supply-chain constraints. Even so, any potential shift into bond markets is likely to be muted, given how low interest rates are.

“Equity markets would have to cool quite substantially before bond markets become attractive in their own right,” she said.

Why now?: The Big Six banks were evenly split over whether the BoC would hike rates today. Bank of Canada officials were likely motivated by fears of shocking the market, analysts said, and the bank made obvious efforts to communicate a clear shift in strategy, saying low interest rates were “no longer required” as the economy climbs out of the pandemic-induced recession.

“It was a cautious approach of not wanting to take markets by surprise,” Young said.

The Bank of Canada’s decision closely resembled that of the U.S. Federal Reserve, which said it would raise rates in March. The Canadian bank’s next decision is scheduled for March 2.