Low Interest Rates In Canada

Interest rates have stayed at the same relatively low rate for years and can be beneficial in many ways. For instance, they make cheaper borrowing costs and mortgage interest payments. This in turn encourages spending and investment and leads to higher aggregate demand. However these advantages do come with disadvantages. Effects such as a reduction in the incentive to save as well as a depreciated exchange rate. In other words, a low interest rate has its perks but is likely to be too good to be true. Lower interest rates have been commonly used for quite a while in Canada and have their ups, but they also have their downs. To start with, they give a smaller return from saving. This will lower the incentive to save and will encourage consumers to spend rather than hold onto money. For example, due to the fact that consumers will be spending their money constantly, the demand for the Canadian dollar with decrease. To be specific, this will cause the exchange rate to depreciate and make imports to become much more expensive. Bank deposits are also affect in a similar way. Back in the day, banking was stable yet boring job. Customers would put their money into their savings accounts in order to get paid interest from the banks. Then the banks used those deposits to give loans to other customers and partners, and charged a larger interest rate. The difference between these two rates would equal out the losses and gains on each of the loans. Whatever was left would become profit for the bank. Today, if banks want to operate the same way, it's way too difficult. Consumers leave a small amount of their money, only what they may need in case of and emergency, in their bank accounts. This amounts to probably a few thousand dollars for the average person. Any more than this is usually invested or saved in a different account. When these saving rates are low, people, most of the time, turn to investing. With so little in their savings …show more content…
Lower interest rates encourage businesses, companies and consumers alike to acquire more debt than they should. For example, as a business or a company thinks about expanding, having a low interest rate could make a once-in-a-blue-moon opportunity to finance the equipment necessary for the expansion for a cheap price. As for consumers, a low interest rate may allow a them to purchase item that they normally couldn't, such as a more expensive house, without having the mortgage payment on the house increase. However, what if these people ran into debt? Would it be that horrible for them? Probably not as long as they handled it correctly and in moderation, but low interest rates can make this falter. This can be really dangerous if a loan was obtained with a lower interest rate and is not fixed, but changes as the rate rises. This make suddenly make the loan rapidly become more unaffordable for the …show more content…
If inflation is to rise by a significant amount than the government may be inclined for that reason alone. This will decrease the amount of spending in the economy and increase the amount of spending and borrowing as stated before. This is due to the fact that, now the economy is turning the other way, the value of the currency will go up as well as people can earn more now from the interest when