By Matt Paul
January 11, 2019
After 5 previous rate hikes to the rate which all the other banks in Canada have to borrow from to obtain money to operate other than the money they have on deposit, the Bank of Canada did not hike it a 6th time. To the average person in Canada who owes $1.70 cents in debt for every dollar earned, this is welcome news.
The average Canadian is sensitive to the price of gas, price of food and often uses their credit card, line of credit or overdraft to shore up the gaps between pay cheques and all of these financial instruments are priced in line with the Bank of Canada’s prime rate. A slight hike in the prime rate at the Bank of Canada can have a 30 to 90 day lag in hitting the prices of loans, we all notice when we get an email about a change in terms or re-pricing strategy right?
If the answer is no, don’t feel bad it is part of living with debt and credit. We are so tied to our loans and lenders that we just accept these as additional taxes and just pay the bill while borrowing ever more. In one sense what does it matter what the price of anything is if we can always borrow enough money to pay for it.
It seems like the government can run endless deficits, so why not Canadian households?
The answer is because someone has to pay the bill. It is you. The last time that Canadian Corporations paid their same share of taxes as Canadian people was 1952. Good news though you have three choices to form your government to keep things running along with you paying the bills and if you are a good citizen you will have a job, buy a house and someday maybe retire. This is the Canada we live in and it is a nation built run on debt.
Low base line debt pricing at the Bank of Canada allows Canadian consumers to continue to spend their available credit products in a relatively fluid and cheap manner maintaining an overall lack of concern for creeping balances. Holding the line on rates says to the Canadian consumer keep moving as normal through life. Keep relying on credit and the security of the appreciation in your home as a collateral asset to tap into when the consumer loan balances get to high. As long as credit is cheap and fluid people do not feel the pressure of their daily living as much. When credit becomes more expensive your job might not pay enough, your car might not be efficient enough on gas, your kids might be doing too many extracurricular activities. I mean that vacation down south might be out of reach.
The people running the system do not want the average people facing these tough choices so they will keep pricing of debt low enough so that default rates and delinquencies fall within a normal tolerance levels. Debt is a party and everyone is invited in our inclusive society. What you are not told is that only the Principal amount of money is created so there will always be default.
The Bank of Canada’s monetary policy in terms of rate pricing is a tool of social cohesion and control at a macro level that filters to the micro level (households). Cheap rates on debt, easy access to credit with increasing asset values reduces number of difficult decisions that individuals and households face. When rates are hiked by the bank, rate increases come next for banks which affect the price and availability of credit to households. When the budget is tightened stress at home increases testing the bonds between partners. It spills out onto the streets in the lower classes. This is a messy situation that no one wants to look at from his or her ivory tower.
So what the Bank of Canada’s hold on interest rate means to the average Canadian is:
Not a whole lot.