Brock Press

Issue date: 6/15/10 Section: Business

Media Credit: Bethany Scholl

It's a sign Canada is over the recession hump, a sign of a strong economy, and we're the first of the G7 to do it since the recession started - so why all the fuss over increased interest rates?
As of June 1, the Bank of Canada's key lending rate became 0.5 per cent, an increase from the previous 0.25 per cent. The hike has caused some serious media uproar, both good and bad, but I say, why not raise the interest rates?
Since late 2007, the Bank of Canada has been continuously lowering interest rates as a means of aid for the poor economy. Lower rates mean borrowing is cheaper, which is appealing to businesses looking to borrow, or consumers needing a loan to make a big purchase like a house or car. So the lower the interest rate, the more money being pumped into the economy.
But now that the economy is showing improvement, the Bank of Canada has decided it is time again to increase interest rates. While the hike of just a quarter of a per cent is not that much, it symbolizes so much more, including optimism.
In 2009, the Bank of Canada set its key lending rate to the historic low (.25 per cent). It also pledged it would keep this rate in effect until at least the end of the second quarter in 2010. With the end of the second quarter just behind us and the increase in interest quickly following, one could assume this hike represents strength in our economy, and belief in future growth.
Also, the increase in interest, while only a quarter of a percent, may make future home owners think twice about buying. Why? Well suppose you're in the market to purchase your first home. As interest rates increase, so does the amount of your mortgage payment. While this small hike in interest might not make a huge difference to you right now, what if the rates continue to increase, and your payments continue to get larger? Maybe buying isn't the best option.
But, how is this a good thing? Buyers may exercise caution and think twice about taking on an unhealthy amount of debt if they consider that interest rates are on the rise.
Still not convinced? Let's look at a quick comparison for more proof.
Suppose we're headed to our favourite restaurant for dinner. We know when we go there that it usually isn't too busy and we generally get our favourite seat. But all of a sudden, we show up and the place is packed! There is a band playing in the corner, all the tables are full and everyone looks like they are having a great time. Next time we go, we might think twice about making a reservation or about showing up at a time we know it could be less crowded.
Well the same could be said about interest rates. When you know every table is available at the restaurant, you won't exercise caution by making a reservation. Similar to interest rates - when you know a loan is available for a very cheap rate, you might not exercise caution and consider whether or not you really can afford to take on that debt.
When you know that your choice of table will be available to you at a restaurant, you might not really appreciate a great seat as much as you would if you got there just in time to snag that last table with a perfect view of the band. Well this again can be said about interest rates. A little hike in interest may make you think twice about what you're really receiving, and remind you money is a scarce and valuable resource. A loan requires serious consideration and will eventually need to be paid back with - you guessed it - interest.

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