Anxiety about interest rate ride nothing new
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. Robert Wright teaches history at Trent University Durham/ GTA in Oshawa.