Canadian Personal Finance Blog

Interest Rates Hover

The Bank of Canada kept one of it’s key rates (the overnight rate) the same yesterday in response to a shakier Canadian Economic view. This means interest rates have flattened for now, and may well be heading back up very soon.

To quote them directly:

Three major developments are affecting the Canadian economy: the protracted weakness in the U.S. economy; ongoing turbulence in global financial markets; and sharp increases in many commodity prices.

Turbulence is never a good thing and I think the bank is reflecting that in it’s monetary policies, by holding interest rates steady.

For someone like me, it suggests that now is the time to start paying down debt, because we may have hit the bottom of the interest rates market, and rates going up is going to mean more money that will have to be spent on Debt Reduction due to interest charges (all my debt is carried in variable interest rate debt vehicles).

Kindred Spirit

Larry MacDonald’s blog is one that I read every day, and I was heartened to see that he and I are not only friends in the N.C.F.B.A. but we are kindred spirits in terms of Nortel’s stock. Larry did an excellent Update on Where Nortel Stands currently.

I was particularly touched by the last paragraph in the post:

So where is the stock going? Despite recent price action, there seems to be an improvement in expert opinion and fundamentals. Still, the situation remains speculative. And add a grain of salt to my update – I’m a long-suffering Nortel investor whose holdings are down 70%.

Glad to know that I am not the only financial blogger with scars from this stock.

TD & BMO Banks Continue to Slide

Both TD and BMO stock have been sliding and as I have said I am not sure what the bottom is, but I am starting to think this is going to be a buying opportunity (for me) very soon. I buy these stocks for straight dividend value and the fact that banks treat their customers very badly, yet the customers keep coming back.

Please take the above paragraph is me meerly navel gazing and guessing, I have no real insight about these stocks, but am interested to hear if anyone else has any opinions on my statements and TD and BMO.

Bank of Canada Stays Pat

Experts, shmexperts! All the major sites were calling for a cut to 2.75% on the overnight rate, well the Bank of Canada saw some sense and held their ground and did not cut the rates this time. I think this is a good idea given the Inflation Boogie Man is out there and I suspect he is going to come and stay for a while too!

The comment from the Bank of Canada States:

If current levels of energy prices persist, total CPI inflation will rise above 3 per cent later this year. However, with the Canadian economy operating in excess supply, core inflation is expected to remain below 2 per cent through 2009. Both total and core inflation should converge on 2 per cent in 2010 as the economy returns to balance.

Against this backdrop, the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely.

Mortgage That’s the Ticket!

In my humble opinion, for me, I should be paying down my mortgage and debt load, and not concentrating on my retirement.

Until about 1 year ago, I had the potential to get a very good pension from my employer (the pension was capped and a new pension system put in place, although I still have some equity built up in my now capped pension), so I was actually investing heavily in a Spousal RRSP to ensure an income splitting model when I retire.

Currently I save about 8% of my income in RRSP or retirement funds (without including the new Pension that I am currently part of, that I am not sure what value it has yet).

Saving 8% annually approaches what I should be saving for my retirement as a minimum (last I heard most “experts” said 10% is a minimum you should save for your retirement). I suspect I am ok for retirement, whatever that actually means to me (given I don’t think I can retire for a long time, due to family commitments).

Wait a Minute, you said….

What do I mean by the title of this post then? I actually am on the “RRSP That’s the Ticket” side of the question of whether to invest in your retirement or pay off your debts? My answer is I think I made a mistake, and should have been much more aggressively paying off my debt load (which is not as low as it should be currently).

I make this statement as my opinion of how my debt load is affecting me. Let me be clear, carrying debt is making me sick, it keeps me up at night, it distracts me and worries me every day since I went into debt many years ago. I am confident this worry has affected my health directly, worrying about this debt and the scenarios that come from still carrying this debt, this late in my working career.

What should I be doing now is the next interesting question? I think I need to sit down with my wife and figure out how to change all of this, but we were going to do that anyhow given it is almost the end of this home finance quarter.

Holy cow, interest rates dropped by 0.50% as set by the Bank of Canada, which means it is even easier to borrow money in Canada.

The recent price-level adjustments for automobiles and the effect of past changes in indirect taxes will keep measured inflation below target through 2008. The emergence of excess supply in the economy should keep downward pressure on inflation through 2009. Both core and total inflation are projected to move up to 2 per cent in 2010, as the economy moves back into balance. There are both upside and downside risks to the Bank’s new projection for inflation; these risks appear to be balanced.

In line with this outlook, some further monetary stimulus will likely be required to achieve the inflation target over the medium term. Given the cumulative reduction in the target for the overnight rate of 150 basis points since December, the timing of any further monetary stimulus will depend on the evolution of the global economy and domestic demand, and their impact on inflation in Canada.

Is this really a good thing?

Good Things about Interest Rate Cuts

Some things that are good about this bank rate cut (assuming the banks follow suit with this rate cut):

1. Your monthly payments will get lower if you have a variable rate of interest credit vehicle (e.g. Line of Credit or Secure Line of Credit). Should you lower your monthly payments? NO! Keep them at the level they currently are, and you start paying down this debt quicker. This is when you get more bang for your bucks!
2. Easier for businesses to borrow money, and thus more chance for expansion and maybe more jobs? Let’s hope that is the case.
3. The stock market looks more attractive an investment vehicle, as interest bearing investment vehicles now pay even less. You should start thinking about consulting with a professional or learn yourself about how to invest intelligently in the stock market (no you won’t learn that here).

Are there downsides to this?

Downsides of Lower Interest Rates

Could there be a downside to this? You bet!

1. Interest bearing investment vehicles which pay next to nothing, now pay even closer to nothing. Bonds and such become even less attractive to invest in. Folks on fixed income that are relying on these type of investments, now may have less disposable income. Maybe take your Grandma out for lunch?
2. People may think it’s a great time to borrow MORE money. Um, NO! If you have been holding off on a big purchase like a house, yes, you may have hit the jackpot here, however, if you are simply refinancing your credit card debt for the Nth time, think again!
3. Your credit card’s monthly interest rate will not be dropping. Isn’t that surprising? The interest rates go up when interest rates go up, however, they don’t drop when interest rates drop. Your pay day loan isn’t going to drop it’s credit rate either.
4. The Canadian dollar will drop in value against the American Dollar, which will translate to higher prices, especially for Gasoline (the root of all price evils).