A run down of what's going on in the market and the company.

Tuesday, July 20, 2010

Control your debts, central bank tells Canadians

By Rob Carrick
Globe and Mail Update

Bank of Canada's mild pace of rate hikes sends a signal to consumers to take control of their finances. Growing pessimism, rising interest rates.

That's the odd reality today for Canadians trying to make sense of what's happening in the financial world. On one hand, there's a growing sense that global economic growth is slowing. On the other, there's the Bank of Canada's decision to nudge its trendsetting overnight rate higher by one-quarter of a percentage point Tuesday.

The net result is a gift to people with debts. They'll have to pay more in interest on their lines of credit, variable-rate mortgages and floating rate loans, but the increase is mild and the pace of further increases will be muted. It could be a lot worse.

In fact, lots of market watchers thought it would be worse last year when they looked ahead to 2010. They saw all the government stimulus pumped into the economy during the recession producing a significant uptick in inflation, which in turn would send interest rates marching higher.

Now, there's talk of deflation, or falling prices. The Bank of Canada's not outwardly concerned about this, but it did throw a mention into its latest statement on rates about how it expects economic growth to slow next year and in 2012 from the 3.5 per cent growth of 2010. Back in April, the bank expected 3.7 per cent growth this year.

Borrowers would undoubtedly say that no rate increases would be ideal. But keeping rates steady at current levels promotes an unhelpful complacency with borrowers. Rates are still close to the emergency lows they hit in the financial crisis and recession. By increasing rates by a quarter point in June and then another quarter point on Tuesday, the Bank has signalled
people that it's time to get control of their debts.

This seems to be working. The latest research on household debt from CIBC World Markets shows that growth in the use of lines of credit has hit the lowest level since 2007. The housing market is showing a more dramatic slowdown, with sales in June down almost 20 per cent from the same period of 2009.

The Bank of Canada is trying to normalize interest rates these days, and Canadians seem to be on their way to normalizing their use of debt after a binge in the past decade.

That's exactly the right way to play the current economic environment. Get your debts in hand before the economy really turns around and decisively higher rates are needed.

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