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in Bank of Canada, Bank Rates

The Bank of Canada lowered interest rates on Tuesday to 1% (on its overnight rate), and now economists are seriously talking about a zero percent rate as a possibility for a short period. This does not mean consumers’ debts will be at zero percent, but banks can borrow at ZERO percent. 

The bank stated:

Against this background, the Bank today lowered its policy rate by 50 basis points, bringing the cumulative monetary policy easing to 350 basis points since December 2007. Guided by Canada’s inflation-targeting framework, the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target over the medium term. Low, stable, and predictable inflation is the best contribution monetary policy can make to long-term economic growth and financial stability.

Interesting statement, and evidently, all banks are lowering prime lending rates and even some mortgage rates by this half-percent drop as well. 

What does this mean?

With interest rates this low, now MUST be the time to borrow money, right? WRONG! Now is the time to pay down debt and not to buy bonds. Given the low payback, you’ll get, that is all this means. 

Interest rates on consumer credit in credit cards will not drop anytime soon. This rate drop allows businesses to continue to function, and it is not an invitation to consumers to start racking up more debt.

I remember I bought my first house and locked in at 13% interest, thinking I was getting a great deal, given we were coming out of 18% interest rates in previous years. Those days seem so long ago.

{ 2 comments }

  • Brad January 21, 2009, 2:12 PM

    I understand your assumption about not buying bonds given the low rates – though making a little money in this market is better than sitting in equities.

    I’m curious why you’re stating now is a bad time to add to your debt load? It is because you think that inflation is going to spike and interest rates are going to follow? I’m actually thinking about adding to my debt load so I can push more money into the market in the event that things take off.

    -Brad

    Reply
    • bigcajunman January 21, 2009, 2:34 PM

      Mostly a paranoid response to losing a lot of money on the market, and watching a lot of people drown in debt. I am too old to borrow to invest now, the risk would kill me, since I have reached the Zen of “there is no sure things in this world” (The Arizona Cardinals making it to the Super Bowl cured me of the “sure thing” view of life).

      Reply

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