Is it time to buy a boat? Wait a minute; it’s almost wintertime. How about buying a new snowmobile or new car and throw a few new iPods in the mix. Have I gone crazy? I don’t think so. However, its that time again, my old friend Band of Canada governor David Dodge is about to announce an interest change. If he lowers rates, that makes everything cheaper. Pay a bit now and then pay later. Sound familiar?
For some of you it may. However, there is no consensus what the Bank of Canada is going to do. By the time you read this it’ll be mute but at the time of this writing, the high priced economists are 50/50 on what the Bank of Canada will do.
From an Ontario perspective there would be nothing better than an interest rate cut. That at least would keep the loonie at bay. Since November 7th we’ve lost a dime on the loonie, however, I don’t see anybody rejoicing in the streets. I think Ontarians were too shell shocked to know what to do.
My boat analogy however is a good one. Depending on your income buying a boat to cruise around in Canadian waters for two months is a luxury. Key to buying a boat is having lots of money but also an interest rate environment where more people can make minimum payments. At the end of the day, you are supposed to do what you can afford. However, that boat looks so nice to some people. If you doubled the interest rates, a lot fewer boats would be sold.
Much has been said about the Canadian economy in overdrive. I’ve certainly put in my two cents. If you were to pick one thing that has been testosterone underlying this economy it would be interest rates. Yes, it’s always the Bank of Canada’s hammer, but the lower interest rates we’ve enjoyed for several years, have been key to maintaining our standard of living and Canada’s economic growth.
Case in point is your loyal commentator. Throughout my life I’ve borrowed a lot of money. My day job takes me out to the flat plains of southwestern Ontario farm country. I’ve bought quite a few acres of that dirt through the years; most of it was financed over 12% interest. So now with an extended period with rates below almost half that, for some of us, it’s like our interest rate Independence Day.
Ditto for much of the rest of the economy. Automobiles are the quintessential example of a sector of the economy, which relies on cheap credit. If you want to buy a new car there is financing available, usually zero interest over five years. If you cannot afford a new car, you can go to a used car lot and once again credit is available. It doesn’t necessarily mean that you get a cheaper car, but at least there is some avenue to getting one.
It is much the same across the North American economy. However, there are differences between the American and Canadian economy when it comes to credit. We didn’t have any “no money down” mortgage problems here in Canada. That was a good thing. However, it was indicative of the way Americans banks dole out credit. Almost anybody can start a bank in the US. In Canada are big five bank oligopoly keeps all the little wannabe banks down. Canadians might grumble about it, but at the end of the day our billion-dollar profit banks help keep our economy stable.
If you have read this column over the last few months it’s a bit of a broken record when talking about the Bank of Canada trying to control Alberta’s inflation. That’s the whole problem he’s having with cutting these interest rates. Inflation is almost oxygen in Alberta. Meanwhile back in Ontario and Quebec, the high loonie is killing jobs and killing economic growth. The fourth quarter economic numbers out of Ontario this year, should be fascinating.
It all wafts of an economy in cruise control. However, what happens if somebody throws a wrench into this well-oiled economic engine, even with a Bank of Canada interest rate cut? It’s always an event that comes along on some un-expectant Tuesday that throws you. At least when it happens this time Canadians have managed to reduce their government debt.
For some of you watching this economic action is akin to listening to the third hour of an old time preacher. However, for economic watchers like myself, it’s better than baseball. I say the Bank of Canada cuts interest rates. If I’m wrong I’ll rely on an age-old tenet among my readers. Your memory for such things has a very short shelf life.