Canadians are quite sensitive about the interest rates we pay. I guess that’s why seventy percent of our credit card balances are paid in full every month. We just don’t want to pay the interest. Most Canadian credit cards have fixed rates, so it doesn’t matter what Bank of Canada does, we probably won’t see a difference on our credit card bills. American credit cards are mostly variable. So when the Federal Reserve cuts rates, Americans catch a break.
Don’t start getting envious. Only about thirty one percent of Americans pay off the full credit card balance each month. That’s the thing about interest rates, cheap lending means more spending. In turn, more spending means higher debt loads…you can guess where this is going right? Yes, the “R” word.
So does the Bank of Canada key rate of .25% really matter to the average consumer? You bet your bottom loonie it does. Interest rates have a broader impact on consumers than just credit cards. Banks make money by charging higher interest on loan products than the interest they give on investment products. Think of it as buying low and selling high. While your savings accounts are showing pathetic interest rates, mortgage rates are deliriously low too, but still higher than savings rates. It’s a balancing act.
Chances are, low interest rates won’t encourage the masses to jump onto the spending bandwagon, and send our economy into a flourish of activity. Canadians are a bit too paranoid for that. However, lower interest rates help those who really need some help right now. Lower mortgage rates mean that people enduring job losses can afford to keep their houses. This in turn, means fewer defaults, which, as we learned from the American sub-prime mortgage meltdown, is a hugely devastating factor for a banker’s bottom line.
The entire world is in recession right now. Every economic area of Canada has been affected, from retail to manufacturing to real estate. Yet, the Canadian financial sector is showing strength on the global market. While European and US banks are teetering on the brink of insolvency, Canada’s major banks ended the first quarter (January 31) with $3 billion in profits. Yup, you read that right, the rest of the world’s banks are going broke, but little ole Canada’s banks are raking in the dough. Ireland is considering adopting a financial system similar to ours, US President Barack Obama has showered our financial system with praise and all over the world, Canada’s financial system is being touted as an industry leader. That’s a lot of pressure for a country that’s accustomed to being ignored on the world stage.
Thus, Bank of Canada lowers the key rate. It may not make your credit card interest any cheaper, and certainly won’t solve all our problems, but it’s one of many steps toward stabilizing our economy. It should be quite interesting to see what comes next. There’s been rumour of 0% key rate, but I highly doubt that. What I do know, is that Canada was quick to take action in 2007 when the credit crisis began, which is why we are not in the same predicament as other countries. I also know that despite all the mockery and jabs, Canada has stubbornly refused to crumble like so many other countries. Even Canadians can’t believe it. We are a country of nay sayers waiting for the other shoe to drop.
I am old enough to remember the year 1987. (Alas, I was teenager). At that time, the Free Trade Agreement was the hot topic on the table. I clearly recall the phrase of the day was “Canada of the United States.” In recent years, government has changed, and a lot of the white haired politicians running things have given way to a younger, more independent generation. I can’t wait to see what this crowd does next. Just because they’ve run out of room to lower the rate, doesn’t mean they are out of ideas.
It’s a shame that too many Canadians don’t really care what our financial leaders are doing, if it doesn’t directly impact their own wallets. You should care, because this is history in the making.