Jan 092011
 

Canada’s overnight interest rate is only 1% right now and so far there is a lack of demand to increase it. A low rate environment can be very beneficial for an economy, for example, making it easier for people to pay their debts.  But on the flip side there are negative consequences as well.

Low interest rates hurt savers. Traditionally 5 year gov’t bond rates have been higher than the rate of inflation. But since current rates are so low, a 5 year gov’t bond today will give you a lower overall, net return than the rate of inflation, meaning you will lose real purchasing power. Low interest rates also help to speed up that inflation. Since rates are so low, people can get approved for larger mortgages even though their incomes remain the same. The lower the interest rate you pay the more debt you can take on (because your payments will be the same.) This is why houses in my neighborhood are 10% more expensive YoY. This kind of growth is not sustainable because the GDP numbers are not there to back it up. Canadians have large debt/income ratios because money is just too cheap and easy to borrow (relatively speaking.)

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