The rising interest rate scare is over – now lower rates are the big threat to your finances

A new worry has emerged for people who stress about debt.

For years, this column and others have warned about the risks of rising interest rates. Now, get ready for the dangers of a lower rate world. Borrowing would be cheap, but job and wage security suffers.

The Bank of Canada left its benchmark overnight rate untouched on Wednesday, but the trend globally for rates is downward. In several major industrialized countries, we have the bizarre spectacle of government bonds carrying negative interest rates.

If you judge by the growth of household debt over the past few years, people never paid much attention to warnings about higher rates. But all that spending has led to a quiet epidemic of stress over money.

A survey issued Wednesday by the Canadian Payroll Association says that 43 per cent of workers are stressed enough about money that their workplace performance is negatively affected. Almost one in four workers spends close to 40 minutes per day worrying about their finances while on the job.

The survey says that if you assume an eight-hour workday, money stress is causing an 8 per cent drop in productivity with a $16-billion price tag for the economy related to absenteeism, turnover, benefit claims and low morale.

Rising living costs, including those related to housing, were the biggest concern of the 4,285 employees interviewed for the survey this spring. Forty per cent said they felt overwhelmed by the amount they owe. One in three said their debts have increased since 2018, and they are still spending more than their net pay.

A subtle form of debt stress comes from the inability to save. According to the payroll association, 43 per cent of employees are living paycheque to paycheque and thus have little room to save.

Interest rate increases in 2017-18 added to the stress of the indebted, but rates plateaued and in some cases dropped. The interest rate on the five-year bonds issued by the federal government to fund its operations has fallen by more than half in the past 12 months to around 1.2 per cent – a huge change in bond market terms.

Five-year Government of Canada bond rates have a big influence on five-year fixed rate mortgages. This means people buying homes and renewing mortgages are avoiding the squeeze of higher interest rates and, in fact, getting a break. Expect to hear a lot of chatter on how this is good news for the housing market.

But avoiding higher rates isn’t a clear win in today’s world because it suggests worsening economic conditions. Canada’s economy itself is holding its own right now, but ominous things are happening around the world. While leaving interest rates alone on Wednesday, the Bank of Canada warned that the U.S.-China trade dispute is having a worse than expected effect on global growth.

Negative bond yields are another sign of distress. In the case of government bonds, it means investors pay a premium price for a bond and ultimately take a loss on their investment even after receiving interest payments. Big institutional investors still buy these government bonds because they offer a stable, liquid place to keep money.

Canada and the United States haven’t so far needed to resort to negative rates to support the economy. But in countries such as Germany, France and Japan, negative rates are a fact of life.

Warning people to reduce debts in case interest rates increased didn’t work at all – just look at how stressed about money people are in the Canadian Payroll Association survey. Might the risks associated with lower rates be the better persuader?

Let’s hope so. Rising rates mean higher interest costs, which you may be able to absorb in one way or another by making sacrifices. The economic upheaval of falling rates may put your income in danger via job loss, reduced hours or bonuses and raises that don’t come through. The falling rate world may actually be worse.

Regardless, the cure for your money stress is the same. Examine your household spending to find expenses you can cut back on and use the money to reduce debt. Every dollar of debt repaid is incremental stress reduction.

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