Pattie Lovett-Reid: Why Canadians shouldn’t be cheering Poloz’s softer rate stance
The Canadian economy has clearly hit a soft spot after the Bank of Canada toned down its stance on future interest rate hikes. Does this mean Canadians should be cheering? Absolutely not, but I fear some will.
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.
The challenge is the day of reckoning doesn’t feel as close as it once was, so why now put off today what we can deal with tomorrow?
Historically, rates go higher when economic growth supports it – when growth is at a pace where demand outstrips supply and prices and wages begin to inflate. For now, based on the slate of weak economic data, a neutral stance appears to be the course of action. With inflation controlled, the Bank of Canada has chosen to focus in on consumer spending that has slowed more sharply than expected and that business investment has been slow to rebound. It appears rates could be low for an extended period of time. My hope is the consumer stays the course, as they have done the heavy lifting in the past. It is now time to hand the baton over to the business community.
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.
In the meantime, 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.
Lower rates for a long period of time can lead to bad financial decisions that ultimately will have to righted.