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rob carrick

It is getting cheaper to borrow, but also scarier.

Falling oil prices have undercut the economy, and the Bank of Canada has taken steps to address that with a surprise cut in its trendsetting rate of one-quarter of a percentage point – from 1 per cent to 0.75 per cent.

The idea of a rate cut is to encourage consumers and businesses to spend and invest.

Message to all the consumers out there: don't.

This is a rate cut that tells you NOT to borrow. Pay down debt in 2015, curb new borrowing, build savings and invest prudently. Identify your family's financial weaknesses and take steps to fix them. Our Globe and Mail financial boot camp coming up the week of Feb. 9 will offer some help.

As a result of the global financial crisis that began seven years ago, interest rates around the world have remained low.

But until recently, low rates and Canada seemed a mismatch. In the United States, low rates were twinned with a big recession and housing market crash. Here in Canada, our economy remained stable and low rates fuelled a housing gold rush. Americans capitalized on low rates to pound down their debt levels. Canadians thought they were invited to an all-you-can-borrow buffet. As of the third quarter of last year, the ratio of household debt to income was at a record high.

Declining oil prices signal a change in our fortunes, but it is more subtle than just the effects on our economic growth. Cheaper oil is in large part a result of weak global demand for energy. It demonstrates that the troubles caused by the financial crisis are not over and that Canada is not as immune as we used to think.

Do not let anyone persuade you this rate cut makes it more attractive to borrow. True, a lower Bank of Canada overnight rate should reduce the prime lending rate at the major banks by 0.25 percentage points, and that in turn would lead to similar reductions in variable-rate mortgages, lines of credit and floating-rate loans.

But in cutting rates, the Bank of Canada has highlighted a surprisingly high level of concern about the economy. We have already seen job cuts announced in the energy sector, and there could well be more. More than 17,000 people will be affected when Target closes its Canadian operations, a development that results from the U.S. department store chain's misreading of the Canadian retail market. Still, it is interesting that Target gave up on Canada as our economic fortunes are worsening.

People in the mortgage and real estate business will love this rate cut because it addresses the No. 1 problem in housing today – weak affordability. If you use a variable-rate mortgage, and the weak economic outlook today suggests that's not a bad idea, then the cost of carrying a megamortgage in Vancouver or Toronto has declined just enough to matter. The Bank of Canada's rate does not directly affect fixed-term interest rates, but it has increased the likelihood these rates will fall.

On a $600,000 house bought with a 5-per-cent down payment, you might save about $70 a month as a result of cheaper variable-rate mortgages. Ironically, the housing market may actually be more at risk now, with rates falling, than it was before.

While rising interest rates have long been singled out as the big threat to the housing market, old-timers in the mortgage market say employment levels are more important. The unemployment rate has been low in recent years, but it bears watching now that the Bank of Canada is taking what amounts to emergency measures to keep the economy moving.

The rate cut is unambiguously bad news for savers. Just what they needed – downward pressure on savings rates that are already miserably low. Anyone with U.S. travel plans is also in tough. Our dollar is zeroing in on the 80-U.S.-cent-range, which means we are probably not far off from having a 25-per-cent cost premium on buying U.S. dollars after retail foreign exchange costs are included. The stock market took off after news of the rate cut, but the euphoria will not last if corporate profits end up as disappointing as the economic outlook.

For years, we have enjoyed the good fortune of having a stable, modestly growing economy and some of the cheapest borrowing costs ever. Now, with borrowing costs falling, we have to adjust to a new reality. Low rates, and the economy to match.

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