Wednesday, March 18th, 2020
The Bank of Canada made an emergency rate cut of 50 basis points (0.5 percentage points) on March 4, 2020 in response to the Coronavirus (COVID-19) crisis, followed by another cut of 50 basis points last Friday.
The price of oil has also fallen dramatically, partly due to expectations of lower global growth but also due to a price war between major oil producing countries. With rapidly changing developments concerning the COVID-19 pandemic, we've faced a lot of bad news stories, and it's undoubtedly left many people feeling overwhelmed.
Up until now, markets had enjoyed the best bull market since World War II. As we know, however, the price of higher long-term returns is market volatility from time to time that can be severe, just like we're seeing now. So a long-term outlook is imperative during times like these, as historically, markets have bounced back from market downturns.
It's important to know what we can control, and what we can't.
When we see headline-making financial news, like an emergency rate cut in response to a health emergency, this can present an opportunity to evaluate our interest rate-sensitive accounts and investments. For example, with an emergency rate cut we may consider the following areas of our financial life:
Are we getting the best interest rate we can on our conservative, long-term savings? If you don't need immediate access to all your savings, perhaps consider putting a portion into a GIC.
It may be possible to secure some interest savings by looking at your current mortgage and comparing it to what's available now. Sometimes you can end up paying less interest overall, even when incurring a penalty to break an existing mortgage early. It's important to run the numbers (or have someone do it for you) to see if you can take advantage of the even lower interest environment we find ourselves in.
What to Do With the Interest Savings?
Some of your current debt might be sensitive to immediate changes in the interest rate environment (some mortgages, lines of credit, etc.) and that means you might feel a bit of extra cash-flow in your bank account very soon.
Consider using part of any new cash-flow towards your goals, whether that's accelerating the paying down of debt, bolstering your savings or retirement accounts, or other financial goals. Another great option is to kick-start your emergency fund if you don't already have one.
What Can't We Control?
No one can reliably predict what happens in the short term with respect to stock markets, bond markets, interest rates, or housing prices. That's why we have to take a long-term focus when we take on risk with our investment portfolios in order to achieve higher potential returns.
That's also why we have to take a long-term focus when thinking about housing. We can't predict when downturns come, and more importantly, we can't time when rebounds start either. But we know that those who ride out the periodic volatility and keep a long-term focus tend to be happy they did.
Although we can't predict the financial markets, there are certain aspects of our finances that can benefit from a review during extraordinary times. The recent emergency interest rate cut is a good example. We can take the opportunity to make sure our savings are working as hard as possible, and use any savings from lower interest payments to accelerate other goals.
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