Interest rate shocker!

interest-rates-cutGenerally speaking, talk of interest rates is more snooze-inducing than warm milk and vacation slide shows, but last week, interest rates provided some drama.

As economic news goes, the Bank of Canada’s decision to lower interest rates again for the second time this year is a monster. Cue economic shockwaves. 

You may have had a passing interest in interest rates (pardon the pun); you may have heard the repeated calls from talking heads in the news about economic doom and gloom and warning households against taking on too much debt. You may think that these warnings are getting Chicken-little esque, but you should still pay attention. And you most certainly shouldn’t use this recent rate cut as an excuse to load up on more house, more consumer goods or more anything, simply because money is cheaper today than it was a couple of weeks ago.

Here’s why:

Time-limited offer

While we usually treat a time-limited offer as an excuse to spend, spend, spend, the financially shrewd will use this window as an opportunity to stomp down that debt that they already have. Your money will literally go further to service the debt that you hold.

Reason being that rates are variable, and then will go up (I promise, even though they’ve been steadily declining). Unless you can count on a hefty raise to keep pace year after year, you are best advised to rein in debt while you can.

The why behind the cut

This recent rate cut (and the one earlier in the year) is no dart-board act in which the head of our Central Bank decides to spin the wheel and set a rate (come on big money).  No- this rate cut is one part reactive and one part proactive.

You’ve maybe noticed a little less pinch at the pumps in the last several months? While that provides a little short term gain for the average car owner, there are longer-term issues for the economy. For a variety of reasons (including the overall impact of the slide in oil prices), the Canadian economy is not growing as it should. In fact, there are key metrics in which Canada is staunchly walking backwards. In fact there are those that are throwing out the “R” word.

What does this mean to you?

The rate cut is meant to stimulate spending. But it also takes into account the possibility of debt loads swelling in an already overloaded debt marketplace. The Bank of Canada has taken a calculated risk.

Given that the economy could be in for a bit of a rocky ride, means that you should be slightly more protective when it comes to your spending and debt accumulation. It’s your best bet to staying on top of things when rates do rise again.