Interest-rate cuts are an invitation from the Bank of Canada for people and businesses to borrow.
Here’s how you might want to RSVP to the central bank: sorry, cannot accept just now. Maybe later.
Borrowing by businesses and individuals is essential to keeping the economy growing. Urging caution about borrowing is almost unpatriotic, but it has to be done because now is a bad time to extend yourself unless your finances are rock solid. Wait until we have more clarity on U.S. tariffs on our exports.
U.S. President Donald Trump said 25-per-cent tariffs will be introduced on Saturday, but clarity may take longer. It’s unknown at this point if the tariff threat is a negotiating tactic or neighbourly extortion.
Think of yourself as clear to borrow if:
- You have a job in a sector that is more or less recession-proof, or at least recession-resistant.
- You have extensive savings – enough to cover your household costs for months.
- You have extensive investments – more than you’ll ever need.
- You have minimal or zero debt right now.
- You’re retired and living off a financially strong defined-benefit pension plan, where you receive payments for as long as you live.
If none of these boxes apply, be a borrower-in-waiting. Wait and see how things play out for you and the country as we work through the challenge presented by Mr. Trump. For the economy, tariffs could echo the pandemic in triggering layoffs and lost income.
The irony here is that, tariffs aside, this is not a bad time to buy a home or borrow for other purposes. The Bank of Canada’s trendsetting overnight rate is down a hefty two percentage points since mid-2024, which means considerable relief for people with variable-rate mortgages, lines of credit and floating rate loans.
The economy has shown enough momentum lately that the Bank of Canada might reasonably have left rates alone on Wednesday instead of making a cut of 0.25 of a percentage point. Going ahead with a cut is a way of putting some extra grease into the economy to help keep it moving forward despite uncertainty.
Debt is a funny word – it’s seen negatively for the most part, and it’s widely agreed that Canadians have too much of it. But almost everyone needs and uses debt at some point, and the economy depends on it for growth. This is especially true of business-related borrowing.
The tariff threat is already altering plans for Canadian businesses, which is another way of saying employers. Some businesses are moving up shipments to book revenue ahead of potential tariffs, and pausing investment. In a tariff battle with the U.S., expect layoffs in some sectors, hiring freezes and a unwelcoming job market.
There’s the financial side of borrowing decisions, and the emotional. The financial analysis looks at how much of your household income goes to debt, and whether there’s enough left over to cover basic costs, live reasonably well and save for the future. There’s also the question of how you’d stay current on your debts if your income was negatively affected.
The emotional aspect is about how you’ll feel if you take on a big debt at a time when the economy is under stress. Are you a risk-taker, or someone who will endlessly second-guess yourself? Or, is your partner someone like that?
With housing, there’s been a feeling in the past that delaying a purchase just means you have to pay more down the line as prices rise. But that’s not a valid reason for buying a home in an uncertain time, unless you have to for work-related reasons.
While housing markets in some cities popped up nicely in December compared with the same month a year earlier, expensive cities such as Vancouver and the Greater Toronto Area were pretty much flat. Housing industry people are looking for falling rates to power a rally in sales this year, but so far this hasn’t really happened.
The tariff story is developing right now, so stay nimble in your thinking about borrowing and other big financial moves. Keep that Bank of Canada invitation to borrow handy, but avoid commitments for now.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.
