Commentary: Flat rates might lead to worse problems down the road

Commentary: Flat rates might lead to worse problems down the road

Commentary: Flat rates might lead to worse problems down the road

A seeming respite brought about by the Bank of Canada’s decision to hold its rates flat is merely temporary, and might even lead to worse systemic weaknesses further down the line, CTV chief financial commentator Pattie Lovett-Reid stated.

The central bank held its benchmark rate at 1.75% earlier this week, amid a tepid real estate market and a struggling economy that grew by only 0.1% during Q4 2018, per numbers from Statistics Canada.

Lovett-Reid cautioned that any celebration of the BoC’s dovish stance might be premature, and does not take into account the possible long-term stresses of such a fiscal environment.

“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 observer added that the bank’s strategy introduces risk by cutting down 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.”

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A greater danger also looms upon consumers, Lovett-Reid emphasized.

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