For eight years, the Bank of Canada has been trying to encourage economic growth by lowering interest rates. It's so not working.
In fact, lower rates are hurting a lot of people more than they're helping. We have to at least acknowledge this as speculation of yet another rate cut grows. It could come as soon as Wednesday, which is the date of the next rate announcement from the Bank of Canada.
The central bank considers the entire economy when it sets rates. Now, let's look at things from the point of view of everyday people. Here are eight reasons why the Bank of Canada shouldn't cut rates any lower.
1. The dollar will fall even more: The most disruptive force in personal finance right now is the falling dollar. That's because it's hitting us all in a vulnerable spot – our grocery bill. Helpful for exporters, a weak loonie is a tax on families and snowbirds who must change Canadian dollars into U.S. currency. Last week, the dollar fell below 70 cents (U.S.) for the first time since 2003. A lower dollar adds downward momentum.
2. It's bad for seniors: By causing the price of imports to rise, a falling dollar puts upward pressure on inflation. If you're a senior on a fixed income, inflation is your worst enemy. Usually, we get higher interest rates along with inflation. No such luck today.
3. It's bad for consumer confidence: Things are going wrong in so many aspects of personal finance these days – the stock markets are falling, the dollar is weak, grocery bills are rising. Cutting rates tells people that things are deteriorating even more. Worse, the Bank of Canada appears to be shooting blanks in lowering rates. If the Bank of Canada cuts its overnight rate by 0.25 of a percentage point, it would take the benchmark back to 0.25 per cent. The last time the bank reduced rates to that level was during the height of the financial crisis in early 2009.
4. It's going to hurt savers: The usual rate cut of 0.25 of a point sounds small, but it would put downward pressure on savings-account rates that have been slinking lower for years and are well below 1 per cent in many cases. A few alternative banks and credit unions have remained above that level, but they may not hold on much longer if the Bank of Canada is cutting. Lower rates penalize people doing the right thing with their money – saving.
5. Young minds are being warped: We are raising a generation of young adults who believe that interest rates are as dangerous as puppies and kittens. Rates either hold steady or fall. Rise? Never. Millennials know we had higher rates in the past, but then again, we also had dinosaurs. The danger here is that people buy houses they can only afford at today's low mortgage rates and then must contend with higher rates later on. Don't laugh. It could happen.
6. It encourages more borrowing: Consumers have carried the economy by taking advantage of low rates to buy houses, cars and more. Now, we have historically high rates of debt and an economy with a wobbly recent history of job creation and wage growth. Low rates are also meant to encourage Corporate Canada to spend and invest, but an uncertain economy undercuts that enticement.
7. It provides cover for banks to pad profits at the expense of clients: When the Bank of Canada twice cut its overnight rate by 0.25 of a point last year, the banks reduced their prime lending rate by only 0.15 of a point each time. Does the Bank of Canada really intend to stimulate both the economy and bank bottom lines?
8. It would recklessly stoke the housing market: As far as housing is concerned, low rates are the finance version of performance-enhancing drugs. Pumping yet another rate decrease into the market isn't healthy. Also, TD Economics says another cut would likely offset the effect of mortgage changes that are designed to cool hot housing markets in Ontario and British Columbia. The changes start Feb. 15 and will raise the minimum down payment to 10 per cent from 5 per cent for the portion of a house price that costs more than $500,000.
Rob Carrick