A number of commentators and Opposition politicians have been critical of Finance Minister Jim Flaherty’s decision to have an aide telephone officials at a bank this week and express displeasure that they lowered their mortgage rates in advance of the spring housing market. The criticism is misplaced. Mr. Flaherty acted within the bounds of his responsibilities, he did not say anything he hasn’t been saying for more than a year, and there was no obligation on the part of the bank to heed the call. If there is a problem with Mr. Flaherty’s move, it was that he didn’t acknowledge that competition in the banking sector is good for consumers.
Mr. Flaherty’s conundrum is that interest rates, led by the Bank of Canada, have remained extremely low for a long time. This has spurred Canadians to increase their personal debt loads to worrisome, although not yet fatal, levels. Exchanging the stimulus created by low rates for higher personal debt is a difficult balancing act for any policymaker. Mr. Flaherty last year urged banks to not “compete to the bottom on interest rates,” and he has repeated the message fairly frequently. He recently chastised the Bank of Montreal for lowering its rates, a chastisement the bank ignored. His call to Manulife Bank this week was merely an extension of that.
It is also fair to say that the lower rates that displeased the Finance Minister are still out there to be had. A well-informed customer never pays a bank’s posted rate. Mr. Flaherty has not prevented consumers from getting the best possible deal; if anything, he has advertised that those lower rates are available. It is wrong to claim, as some have, that he interfered with the free market, or was doing anything more than reinforcing an important message about personal debt.
What comes across as counter-intuitive to most Canadians is that, if they are supposed to lower their personal debt, one of the best ways to do that is to get a lower mortgage rate. Mr. Flaherty has not explained why the only time he (publicly) calls a bank, it is to ask them to charge customers more. It would be nice if he also occasionally gave banks a call about, say, high fees, or the closure of branches in poorer neighbourhoods.