Interest rates are going up but will Canadians tone down their borrowing?

They say it takes three days to form a habit. So, what does a decade of easy, cheap money do to the behaviour of a whole swath of Canadians who've never known anything else?

First hike in seven years a 'wake-up call' for a generation that's only known ultra-low rates

Until last week, many Canadian borrowers had never seen the Bank of Canada raise interest rates. Will last week's hike — and the prospect of more increases to come — change their behaviour? (Jonathan Hayward/Canadian Press)

They say it takes three days to form a habit. So, what does a decade of easy, cheap money do to the behaviour of a whole swath of Canadians who've never known anything else?

"For them, low interest rates, lots of debt, that's been their normal," says personal finance expert Preet Banerjee.

He says that borrowing behaviour may have made some sense during the last decade of ultra-low interest rates. Policy-makers spent most of those years sounding the alarm that Canadian debt levels were getting out of whack. We were repeatedly warned interest rates will rise eventually.

And yet, they never did. Until now.

There's a whole demographic of Canadians potentially looking at a rude awakening now that the Bank of Canada has finally eked out a quarter point increase in lending rates.

Banerjee says this could be the beginning of a major behavioural shift. But after all those years of habits building up alongside household debt levels, he doesn't expect it will happen overnight.

"If anything this might be a wake-up call for some people, but I don't think people are going to get too worked up yet."

Business behaviour

And it's not just consumers that might need to change their behaviour.

Goldy Hyder, CEO of public relations firm Hill and Knowlton Canada, says habits have formed on the corporate side as well, where it's been a decade of grinding out profits through cost-cutting. The rise in interest rates is a sign the economy is on a healthier track. But the real test is whether businesses that have spent all these years on the sidelines will now begin investing again.

"But that requires behavioural change and this behaviour may have set in, so it's going to take some time to adjust taking some of those risks that are necessary," says Hyder.

Risks and unknowns abound during this transition away from emergency-level stimulus.

Bank of Canada governor Stephen Poloz says he expects Canada's economy to grow with expanded exports. But if there's one sure bet in this age of uncertainty, it's that the crystal balls are broken. No one can say with any real confidence what the economy will look like six months or a year from now.

Stephen Poloz, governor of the Bank of Canada. (Fred Chartrand/Canadian Press)

And exports, of course, depend on international trade. And the only thing garnering more headlines than the rate hike is the threat of a trade war with our biggest customer, the United States.

It all comes down to trade-offs

Banerjee says another enormous unknown is whether interest rates will continue to rise and how quickly that may happen.

A jump by a mere one quarter of one percent isn't likely to push most Canadians over the edge. But he says for anyone who's spent the past ten years building up debt, now is the time to think about how you manage your money.

"And if you are living paycheque to paycheque, this is when you have to start saying, 'What are the trade-offs I'm willing to make if this continues," he says.

"What are you willing to cut out if the cost of servicing debt goes up? Because if that happens and there's no change in your income, something else has to give and you need to plan what that's going to be."

For many, all this will ring hollow. The dual alarms over eventual interest-rate hikes and indebtedness have been sounding for years. Sure, the Bank of Canada finally pulled the trigger, but that quarter point hike alone won't prompt much change.

​In fact, some will see an opportunity. People priced out of Canada's overheated housing market may conclude that rising interest rates will cool the market and give them a chance to take on new debt and buy that house they couldn't afford just a few weeks ago.

But some consumers will heed the warnings and get their financial houses in order. Some businesses will take that leap of faith and invest in innovation, jobs and creativity.

Those twin pillars of consumers not overburdened with debt and businesses investing in the economy are precisely what's needed for a healthy economy to grow. And just what the Bank of Canada is hoping for.


Senior Business reporter for CBC News. A former host of On the Money and World Report on CBC Radio, Peter Armstrong has been a foreign correspondent and parliamentary reporter for CBC. Subscribe to Peter's newsletter here: Twitter: @armstrongcbc