It’s hard to figure how an interest rate cut will help a population that has decided its No. 1 financial priority is to buy and hoard toilet paper.
Anxiety about the spread of the coronavirus has people coming unglued in the most 21st century way – they’re going shopping. A top talking point in what might be the newsiest week since 9/11 was grocery stores being emptied of non-perishable food items and hygienic products such as toilet paper and hand sanitizer.
The Bank of Canada has many missions in overseeing the economy, one of them to calm things down in financially uncertain times like these. For individuals, this is done with emergency interest-rate cuts such as the one announced Friday afternoon.
While pasta, oatmeal and toilet paper were disappearing off grocery shelves, the central bank announced a cut in its benchmark lending rate of 0.5 of a percentage point. Yes, the bank announced an identical cut just last week.
Lowering interest rates is meant to free up money so businesses and individuals borrow and spend more. It worked like a charm in 2008-09. Twelve years later, the country has borrowed itself to the saturation point.
A few yahoos were still fighting over Toronto real estate early in March, but how can that last if the economy tanks? We may soon see five-year fixed- and variable-rate mortgages in the 2-per-cent zone, a stunning development. Years ago, breaching the 3-per-cent level on five-year fixed-rate mortgages seemed like a contravention of the laws of nature.
But it makes no sense to take on debt right now unless you’re in a growth business such as bankruptcy trustee and have no fear of layoffs, reduced hours or unpaid leave. What the Bank of Canada wants you to do – borrow and spend – is the wrong play if you value stability in your family finances.
Neither should you hoard. It’s gross, people. A totally understandable reaction to unprecedented stress, but still gross. People should not have to go without grocery basics because someone else got to the store before them and cornered the market on Charmin and Kraft Dinner.
Want to help the economy while guarding your own finances? Cool it on panic buying at the grocery store and save your money for the day when the virus scare is done and it’s safe to go back out into the world and spend freely. The economy is going to need all hands on deck to get back up to a normal level of activity. Be ready to do your part.
It’s scary times like these that personal finance experts were talking about when they urged you to have an emergency fund to draw on if your paycheque was interrupted or you incurred surprise expenses. But let’s say you don’t have an emergency fund. In this case, there’s some practical value to the rate cut announced by the Bank of Canada.
Absent an emergency fund, a home equity line of credit is an acceptable place to find money in a pinch. HELOC interest rates are falling because they track the Bank of Canada’s overnight rate. Essentially, the central bank has engineered a cost cut in a last-resort source of funding for households in trouble. You have to pay the interest owing on a HELOC every month, but you typically can hold off on repaying principal until you’re financially stable again.
We’ve had our economic ups and downs in the past decade or so, but a consistent theme has been that lower interest rates are good news because they make it cheaper to finance the purchase of houses, cars, renovations and more. Now, lower rates are a shrill warning of trouble ahead for the economy. A recession is entirely possible, and more stock market upheaval is a done deal.
Conserve cash, stock up in moderation and, for gosh sake, find a diversion from all the troubling news of the day. No, not more shopping.
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