Anx­i­ety about in­ter­est rate ride noth­ing new

The London Free Press - - COMMENT - ROBERT WRIGHT SPE­CIAL TO POST­MEDIA NEWS Robert Wright teaches his­tory at Trent Univer­sity Durham/GTA in Oshawa.

In re­cent weeks, we’ve heard a great deal about the like­li­hood of “nasty” in­ter­est rate in­creases. Cana­dian bor­row­ers are be­ing ad­vised to brace for the worst.

But what does the worst re­ally look like? Here’s a trip down mem­ory lane.

Be­tween 1935 and 1967, the Cana­dian prime rate — the rate at which the banks lend to their best cus­tomers — never ex­ceeded six per cent. Rates be­gan to rise in the late 1960s, and in 1974, fol­low­ing the first OPEC oil shock, prime reached dou­bledig­its for the first time. But be­cause wages also were ris­ing in the ’70s, the all-im­por­tant “real in­ter­est rate” — prime mi­nus in­fla­tion — re­mained man­age­able for bor­row­ers.

Then, in the last half of 1979, things started to go hay­wire. Prime jumped by three per cent be­tween June and Novem­ber, peak­ing at 15 per cent. Un­sus­pect­ing Cana­dian mort­gage hold­ers were blind­sided. Mort­gage de­faults hit record lev­els.

High in­ter­est rates, then as now, were meant to curb in­fla­tion, prop up the value of the Cana­dian dol­lar and pre­vent in­vestors from mov­ing money out of Canada. In the United States, pitched bat­tles were fought over mon­e­tary pol­icy for most of the Ron­ald Rea­gan era. In Canada, where eco­nomic or­tho­doxy held that Cana­dian rates must be com­pet­i­tive with Amer­i­can rates, the im­pact of U.S. mon­e­tary pol­icy was felt di­rectly.

In April 1980, the Cana­dian prime rate hit 17 per cent for the first time, then spiked again in De­cem­ber to 18.25 per cent. Some days, posted bor­row­ing rates fluc­tu­ated by as much as a full per­cent­age point. On Dec. 11, Cana­di­ans were warned that lend­ing rates in Canada might rise to 25 per cent be­fore year’s end.

It didn’t hap­pen. But with rates stuck in the low 20s, Cana­dian bor­row­ers were pum­melled none­the­less. Home­own­ers re­new­ing their mort­gages got stuck with rate in­creases above five per cent. The “real in­ter­est rate” surged to al­most twice the rate of in­fla­tion. Hous­ing starts fell dra­mat­i­cally, as did auto sales. Many Cana­di­ans lost their homes. Busi­ness bank­rupt­cies spiked. Farm­ers re­ported they were be­ing driven off the land. Cana­dian snow­birds stayed home in droves.

Not sur­pris­ingly, the gov­ern­ing Pierre Trudeau Lib­er­als were be­sieged. On Dec. 18, 1980, they faced an all­night “on­slaught” in the House of Com­mons from the op­po­si­tion par­ties.

Start­ing in late De­cem­ber 1980, the prime rate eased some­what, bottoming out at 17 per cent in March 1981 be­fore soar­ing again that sum­mer. By this time, bor­row­ers were adapt­ing to the new aus­ter­ity, but it wasn’t easy. In Au­gust 1981, prime hit 22.75 per cent — the high­est it has ever been. Posted mort­gage rates for first-time home­buy­ers peaked that month at an his­toric 21.75 per cent.

The fol­low­ing month, Septem­ber 1981, in­ter­est rates fi­nally be­gan eas­ing. For about a year, they re­mained in the high teens be­fore drop­ping in Oc­to­ber 1982 to 13.75 per cent. For most of 1983 and 1984, prime hov­ered in the 11- to 13-per cent range. Only in July 1986 did it fall back into sin­gledigit ter­ri­tory.

Fast for­ward to the present. Since Septem­ber 2008, the Bank of Canada rate has not risen above two per cent and for much of this pe­riod it has moved en­tirely within a 0.5 to 1.25 per cent range. The ef­fect on con­sumers has been hyp­notic. To­day, the Bank of Canada rate re­mains at 1.75 per cent, prime is 3.95 per cent, and five-year vari­able mort­gages are in the 2.65 per cent range. Both the U.S. Fed­eral Re­serve and the Bank of Canada are man­ag­ing rate in­creases with care lest North Amer­i­cans find them­selves in an­other re­ces­sion-in­duc­ing debt squeeze.

When it comes to con­sumer debt, of course, ev­ery­thing is rel­a­tive: to in­come, to the rate of in­fla­tion, and to over­all in­debt­ed­ness. You don’t have to be an econ­o­mist to ap­pre­ci­ate that the ex­pec­ta­tions of Cana­di­ans who lived through the in­ter­est-rate cri­sis of 1980-81 and those who came later are worlds apart.

When Cana­di­ans will find them­selves in such dire straits again re­mains an aca­demic ques­tion, but whether they will find them­selves scram­bling des­per­ately to man­age is not.

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