Rate Cut

Today’s post is about something of interest to a lot of people. 😀 Earlier this week the Bank of Canada surprised just about everyone with an interest rate cut from 1.00% to 0.75%. The Canadian dollar dropped to the lowest it’s been in years. Over 20 economists were surveyed prior to the Bank’s bomb shell reveal and not a single one of them expected the news, lol. Maybe economists are just there to make weather forecasters look good. 😛

Even our country’s most prolific real estate blogger, Garth Turner, was taken by surprise. Just last week a commentator on his site named BlackDog pointed to a report which predicted this week’s interest rate cut, and Mr. Turner promptly replied to dismiss the report. Not even a best-selling Canadian author of 14 books on economic trends saw this announcement coming. It just goes to show how difficult it is to read the minds of central bankers. 😕


The Rate Cut is good for:

  • Debtors who have variable rate mortgages, lines of credits, car loans, student loans, or other types of floating rate debts. Every $100,000 of debt one has will translate to about $20 a month of LESS interest one has to pay. 🙂
  • Investors in the stock market. Lower cost of borrowing is a type of monetary stimulus that has the same effect of printing money. The U.S. stock market has gained 100% over the last 6 years since it began it’s Q.E. programs.
  • Existing bond holders. Lower coupons on new bonds mean existing bonds are worth more.
  • Industries like manufacturing, exports, hospitality, tourism, companies with primarily $USD revenue, or any other businesses that benefits from a lower Canadian Loonie.
  • People who have debt in general. Lowering interest rates is inflationary which diminishes the value of one’s debt.
  • Home owners. Rate cuts drive real estate prices higher.

The Rate Cut is bad for:

  • Savers. High interest savings accounts are looking less attractive with the threat of inflation.
  • Consumers. Canadians import a lot of food and staple items from the U.S., which will cost more for us with a lower $CAD.
  • Cross border shoppers. Trips to the U.S. will become more expensive.
  • People living on a fixed income, like pensioners.
  • Retailers who’s suppliers are from outside of Canada

Thank you Stephen Poloz for this rate cut. 🙂 I appreciate your continuing support to prop up the already inflated housing market in Vancouver and increasing my home’s value. You’ve successfully penalized all the savers and risk adverse members of the investing community by lowering the returns on their GICs and term deposits. You have instead rewarded the speculators and heavily leveraged investors, such as myself, by leaving more money in our pockets, 😀 and encouraging even more borrowing activity! 🙂 Hurray for cheaper financing and more incentive to use debt because that’s exactly what Canadians need more of right now. I applaud your push for higher inflation with this rate cut. The 2% CPI in 2014 just wasn’t high enough. I’m sure making it even more expensive to live in this country is exactly what consumers want, especially when more people are out of work now than a month ago. 😛

But sarcasm aside, I really can’t complain. Measured in $CAD my gold/silver collection has appreciated by 18% over the last month alone. My stocks and bonds are also doing quite well. This year’s new home assessment shows my apartment is worth $5,000 more than the previous year. I’m very fortunate to be carrying $300,000 of variable rate debt right now, because if my bank also decides to lower its Prime lending rate by 0.25%, which it has not yet confirmed, then I’ll be saving an additional $60 per month of interest! It will feel like a tax cut, haha. 😀

This is why I don’t try to time the markets with my core holdings. Most people already understand that timing the stock market is not a good idea. But many don’t realize that the same principle also applies to the housing market, economic data, currencies, oil prices, and interest rate policies.

The key is to be flexible with our money. This means not locking in the interest rates on our debts. My floating mortgage rate is only 2.6%. If we choose a fixed rate mortgage, we’re essentially timing the market and betting that interest rates will increase in the near future. But choosing variable, on the other hand, doesn’t mean we’re predicting rates will go down. Rather, a variable rate mortgage is usually cheaper to finance than a fixed rate one to begin with, which makes the variable rate the better option.  The majority of mortgage holders in Canada are however in fixed mortgages, but maybe they will reconsider the next time they renew. 🙂

Random Useless Fact:

Miss Canada sticks out at the 2015 Miss Universe Pageant


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01/23/2015 9:08 am

That’s a real surprise, because I thought US and Canada economy go hand in hand. All bets in the US to raise interest rate by mid 2015 to control inflation. Is it a good time for you to refinance your properties? The fees involved can be a burden.

01/24/2015 6:26 pm

You are sharp! In 2007 I had the opportunity to do 5 years arm, but I opted to pay 2 point $10k to have the rate of 6.25%, my payment was outrageous. I had to refinance 2 more times to get the rate down to 3.85%. I saw how financial samurai guy only do 5 years arm. Either this guy is truly lucky or he’s really smart to forseen these years old low rate. It’s just blowed my mind how people can figure this out.

01/24/2015 12:02 am

Darnit, I should have chosen a variable rate for my mortgage. You win, I lose!

Paul N
Paul N
01/24/2015 9:49 am

I wonder if anyone noticed the basketball like score on the scoreboard behind miss Medusa Gretzky there?

01/25/2015 8:07 am

So TD announced they would not be lowering their prime rate to go along with BOC’s rate cut. They have however lowered the rates on all their savings accounts by 0.25%. They have no problem lowering their rates when in their favor but not in the favor of the customers. Pretty annoying move, but I guess thats some more profit for them, which will hopefully help my TD stock. HAHA.

Paul N
Paul N
01/25/2015 8:36 am
Reply to  Andrew

That’s in pretty poor taste to make an official announcement that your not dropping rates but quietly lower the interest paid to your loyal clients. Funny how a detail like that isn’t brought more to light in the mainstream media sources. Nice that you saw that and brought it up here. I’m with TD that kind of pisses me off.

01/27/2015 1:12 pm

The media is starting to pick up the story.


01/31/2015 5:11 am

Excellent article and loved the sarcasm a lot. I totally agree with you. Housing will get bubbled and people will borrow more money with the rate cut. What a dumb and scary movement. For times like this, I will focus more on my portfolio building and live within my means.