Interest rates had to rise
Say goodbye to cheap money, Canada. What were arguably the nine best years for borrowers in this country’s history lurched to a halt Wednesday when the Bank of Canada raised its key interest rate to 1.25 per cent.
It’s a move every consumer, business or government that owes or wants to borrow money will regret because sooner or later their debts will cost more — and we are, after all, a nation of debtors. But don’t be mad. The rate hike had to happen. Along with any regret should be the consolation the Bank of Canada did the right thing and in a characteristically modest, Canadian way.
Comforting, too, should be the knowledge that rising interest rates reflect an economy doing very well without the Bank of Canada juicing it any longer.
While you might feel the pain of higher interest rates, you will likely gain from our economic rebound. Look back to when and why these rates plunged. In 2009, Canada was reeling from the global financial crisis.
To stave off economic disaster, the Bank of Canada slashed interest rates to encourage spending, especially by consumers.
The strategy worked. People borrowed and bought. A depression was averted.
But it took nearly a decade for Canada to truly leave the Great Recession behind.
By last year, things were really looking up. The Gross National Product was growing, the job market was healthy, the unemployment rate was close to the floor, and by year’s end wages were on the rise as they hadn’t been for ages.
But while we’re out of the frying pan, we’re staring at other fires.
Canadians are more indebted than the citizens of any other Group of Seven nation.
Not only are housing prices out of reach for middleclass families in the Toronto and Vancouver areas, there are fears of a real estate bubble that could burst.
These factors, along with the threat of higher inflation, spurred the Bank of Canada to act.
Canadians became addicted to cheap money the way some patients get addicted to painkillers. The central bank is weaning us from that dependency.
It’s worth remembering that even with Wednesday’s small hike, interest rates remain relatively low.
In the prerecession year of 2007, the central bank’s key lending rate was 4.5 per cent — far higher than today’s rate. The message for Canadians now is to adjust. Realizing mortgages and other debts will cost more, many households should economize in other areas. Our heavily indebted provincial and federal governments should do likewise because rates could rise again this year.
As for the central bank, it promises to move cautiously in the coming months, and it should.
Many people fear financial hardship if interest rates rise much higher.
The bank must be careful as it moves the rate needle so that it doesn’t damage consumer confidence and add to the hardship of households already maxed out.
The interest-rate operation has succeeded so far, but we don’t want the patient — Canada’s economy — to slip into another coma.
(This editorial was published in the Waterloo Region Record on Jan. 19 and distributed by The Canadian Press.)