Mounting interest

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It's a funny thing: generally, when Canada's banks issue news releases announcing plans to lower interest rates, the releases come with the headline "Bank X decreases interest rates."

On the other hand, when rates rise - as they did for at least one major Canadian bank, which announced increases of 0.2 per cent on several four-year and five-year mortgages on Thursday, the news release has the headline "Royal Bank announces change in interest rates."

It's the third time the Royal Bank has increased rates, and Scotiabank followed suit Friday. A decrease is a decrease; an increase is a "change."

Why the difference?

Like so many things in the financial world, it's about optics.

In fact, some time in the future, historians may look back and marvel about those optics and wonder if they don't act closer to voodoo than they do to any clear economic science.

Wednesday, the chairman of the U.S. Federal Reserve, Ben Bernanke, announced that prospects for the American economy were looking up - sounds like a good thing, especially for countries like ours that sell goods into the States, right?

Not exactly. Bernanke's announcement was met with trepidation, not because improvements in the economy aren't a good thing, but because those improvements mean the U.S. agency may slow or stop its efforts to prop up the economy by artificially keeping interest rates low.

The threat of an end to the current era of easy money - some of the lowest interest rates in years, for everyone from multinational companies right down to the lowly everyday residential mortgage holder - sent stock markets plunging, the currency market spinning and played havoc with commodity prices.

All that, despite the fact that Bernanke wasn't talking about immediate change - he was talking about gradually reducing the Reserve's efforts to buy down rates, allowing those rates to reach "normal" levels by some time in late 2014 or early 2015.

The announcement might have been for a gradual change - the results were anything but.

As far as optics go, it's like the markets, already jittery, spent their day watching the comments through the wrong end of the fiscal telescope.

The problem, of course, is that while the optics may be strange, convoluted and far away, the effects are anything but.

Powered in part by low interest rates, housing prices on the northeast Avalon have skyrocketed. Problem is, there are a fair number of those purchases carrying mortgages that are only sustainable if interest rates stay low. The rapid growth of the homebuilding industry here is doubly dependent on low rates: in the first place, to finance the construction of new homes, and in the second, to provide the financial backing for purchasers to buy those new properties. (With optics such a crucially important part of the business, it's no wonder that anyone in the business will tell you that everything's fantastic, regardless of their own legitimate and private fears.)

Remember at the beginning of this editorial, when we said "it's a funny thing"?

Get ready: there may be nothing funny about the next interest rate cycle at all.

Some people insist change is a good thing, but when it's banks talking, it might be anything but.

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Organizations: Royal Bank, Scotiabank, U.S. Federal Reserve U.S. agency

Geographic location: Canada, Avalon

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  • Jerome
    June 23, 2013 - 09:22

    Does anyone really believe that higher interest rates are imminent? I don't believe that interest rates will rise significantly in my lifetime, and I'm not 60 yet. When people talk about interest rates, they talk about the cost of borrowing and what a 1% hike would mean to a mortgage holder. That, in itself, is true. What is not discussed is that when interest rates go up, not only does the cost of borrowing go up, but interest accrued on savings also goes up. That is where the problem lies for the Fed and the Bank of Canada. When seniors could put their life savings in an interest bearing account and get 4 or 5 percent annually, they were happy enough. Over the last few years on programs like The Fifth Estate and W5, we have seen numerous stories of seniors who have lost everything, because they trusted their money with Wall Street investors, simply because regular savings accounts amounted to keeping your money under the mattress. The long and the short of it is, those investors (gamblers) wanted whatever savings you had, and you had to live in hope that their gambles paid off. When Wall Street stops calling the shots and dictating government policy, then interest rates will rise. I'm not holding my breadth.