Low interest rates are not a sign of good economic management and a strong economy.
The Bank of Canada lowered the prime rate yet again in spite of Stephen Harper’s economic oversight because the economy is still on the edge of collapse. In 2009, emergency printing of hundreds of billions of dollars, massive bank bailouts, and the lowering of the prime rate from 4.5 per cent to .025 per cent barely saved us. They have never been able to raise rates above one per cent, and are now forced into more easing. If the economy was really strong, rates would be raised in order to slow inflation.
We now have created an unsustainable bubble in housing prices based on lower and lower mortgage costs allowing for people to “afford” a higher sticker price (making us all feel richer).
Unfortunately, this leaves two questions.
1. At 0.75 per cent, how much lower can the prime rate be lowered in order to prevent the housing collapse which now appears to be underway anyway because of the collapse of the oil sector (also not foreseen by Mr. Harper, even though resource economies are renown for their cyclical ups and gut-wrenching downs)?
2. How do our pension funds and retirement savings deposits keep up to inflation with interest rates so low? Bonds were the traditional ‘safe haven,’ but they are certificates of confiscation when rates rise. Any pensioner will tell you that the “official” rate of inflation is much lower than the actual cost increase in goods and services, which are about 4.5 per cent using 1990 methodology and eight per cent using 1980 methodology.
This is unsustainable, and Mr. Harper is leaving a poisoned chalice for his successor.