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.