Interest rate cut may deliver ‘hammer blow’ to consumers: experts

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Morneau says Liberal plan ‘right approach’ facing gloomy economy
Finance Minister Bill Morneau says the Liberal Party is paying close attention to the economy and falling dollar. – Jan 18, 2016

The Canadian dollar will spiral even lower. It will make life more difficult for seniors who rely on fixed incomes as well as for low-income households who face disproportionately bigger burdens paying for things like food and clothing.

It could seriously dent consumer confidence, yet encourage even more borrowing, adding fuel to overheated housing markets in Vancouver and Toronto.

A chorus of opinion has gotten louder in recent days saying that perhaps the last thing Canada’s ailing economy needs is another interest rate cut when the Bank of Canada makes its latest policy announcement on Wednesday.

“We remain skeptical that it should cut rates,” economists at BMO Capital Markets said.

Odds are on the country’s central bank dropping its key, trendsetting rate to a record low of 0.25 per cent (from the current 0.5 per cent) this week to help fight off the deep economic chill caused by a worsening collapse in oil prices.

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Higher prices

Still, the shot in the arm the cut may provide the economy may well be offset by the hit consumers and households take, experts say.

While the currency’s plunge toward the mid-60 cent U.S. range may be good for exporters and industries that sell products abroad, consumers are getting wacked with increased costs for everything shipped into the country.

Another rate cut could risk a much deeper slide in the loonie, triggering a wave of price increases at stores, experts suggest.

MORE: ‘The plunging loonie is juicing food costs’ 

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Sagging confidence

Then there’s the psychological hit from headlines blaring out the threat of a 60-cent loonie.

“The sliding currency threatens to deliver a hammer blow to already-sagging consumer confidence,” BMO economists said.

For their part, even exporters are suggesting they don’t need the added benefits of an even lower currency.

“My advice right now would be to even take a look at increasing interest rates by a quarter of a point,” Jayson Myers, chief executive of Canadian Manufacturers & Exporters told Bloomberg News.

“Interest rates are low already. A little bit of dollar stability would be better.”

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