Flat rates might introduce worse long-term risks – observer

by Ephraim Vecina10 Mar 2019

Flat interest rates can appear good for now, but Canadian home buyers and owners might be at greater risk of long-term fiscal troubles as a result, CTV chief financial commentator Pattie Lovett-Reid warned.

The Bank of Canada held its benchmark rate at 1.75% last week, amid a sluggish real estate market and a tepid economy that grew by only 0.1% during Q4 2018, per numbers from Statistics Canada.

Lovett-Reid argued that the central bank’s strategy invites greater risk by cutting off the options available to the government.

“I get that with an economy in trouble keeping rates low can help, but it also reduces the number of tools in the toolkit if there are harder times in the future.”

Such risks will make themselves most felt among consumers, she added.

“Savers continue to take it on the chin with many retirees hurt in the process, stocks have continued on an upward trajectory as pension plans and investors search for better returns. And, as we have seen in the past, low mortgages can lead to housing bubbles,” Lovett-Reid explained.

“Lower rates for a long period of time can lead to bad financial decisions that ultimately will have to righted.”

Read more: TREB puts more pressure on Ottawa

In the worst-case scenario, the economy might suffer from major systemic weaknesses further down the line.

“There is a downside to low rates for an extended period of time. Sure, low rates are meant to encourage Canadians to get out and spend and, in essence, help to prop up the economy. But that can happen only for so long as the debt levels of Canadians continue to rise and a cohort of Canadians – millennials specifically –  getting very used to cheap money for homes, cars, and a lifestyle that isn’t sustainable.”

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