The Canadian economy looked strong until last Wednesday, when the Bank of Canada slashed, gashed, trashed, cut, and gut its overnight lending rate. It was the sort of bold move that would lead Fat Bastard to inquire, “Frisky are we?”
Canadians were rightfully shocked. They went to sleep earning ~1% interest on their savings account balances, and woke up earning a paltry 0.75%. We might assume that many called the police to report a robbery.
Yet, for many Canadians, lower interest rates are actually a good thing. It sounds insane, but it’s true. Canada’s household debt-to-income ratio hit 162.6% this December, so chances are most people are sitting on more debt than savings. While much of that debt is tied up in non-negotiable credit card debt and fixed-rate mortgages that remain unaffected by an interest rate cut, this cut has to be good news for a few people. Those who have variable-rate mortgages will see their interest rate fall. Remember when you had the option to go for a variable rate mortgage, but all the experts told you to stick with the fixed rate because the economy was recovering and interest rates were already low? That was your chance to enjoy this news. You blew it.
Maybe this move wasn’t so great for most people after all. What is 0.25%, anyway? If you earn the Canadian median individual income of $27,600, a 0.25% increase in your annual wage would mean an extra $69. While that number might be hilarious, and is certainly better than nothing, it won’t really boost the bank account. Face it, fixed and variable rates aside, today’s big news didn’t really mean much for you unless you happen to be a high roller.
Small moves by central banks matter more to people who regularly move large sums of money. 0.25% of a couple million provides greater incentive to spend or save than 0.25% of the amount the majority of people will ever consider. We live in an age where Oxfam forecasts that the most affluent 1% of the global population will soon own 50% of all wealth. If Steven Poloz wanted to offend with a grotesque shocker, he should have scrapped the interest rate cut and said that instead.
While today’s message likely means little for your personal finances, it means a lot for the Canadian economy—not in the way you might expect it would. While many will view the interest rate cut as a cause for more spending, it may be more appropriate to think of it as an effect of a sputtering, one dimensional economy. In Poloz’ own words, “The drop in oil prices is unambiguously negative for the Canadian economy” because “Canada’s income from oil exports will be reduced, and investment and employment in the energy sector are already being cut.” That’s why the Bank of Canada cut interest rates. If there’s one thing that should concern you in today’s news, it’s that the price of a viscous, flammable liquid can cause so much trouble for so many people.