We have Run out of Room in the Interest Rate…Future Measures of the Bank of Canada to Stimulate Canada’s Economy

As we have all been talking about, the buzz around town is now that Canada’s Prime Lending Rate has hit rock bottom, what are they going to do next to stimulate an economy that is facing a downward spiral.  The answer some are suggesting seems to be Quantitative Easing.  Although this concept may sound complicated, it is just a fancy phrase for essentially printing more money!  It is a way for the Central Bank to expand its balance sheet, the only means to do that with interest rates already being so low, is to print more money.

The printing of money would cause an influx in the economy through the Bank of Canada’s ability to buy a variety of assets such as asset-backed securities, government bonds, corporate bonds, and even stocks.  The purchase of these financial assets works to  decrease the supply of these bonds in the market and increase prices.  This in turn, drives down yields, which fixed-rate mortgages are based on.  This in turn reduces the cost of borrowing and enables more people to qualify for loans to generate economic activity.  

Although quantitative easing sounds like it is a great thing and it works to stimulate the economy, it does not come without negative effects as well.  With the implementation of Quantitative Easing comes a recovery in the economy, which comes with inflation.  When we have higher inflation, it leads to higher interest rates.  The more money there is floating around in the economy, the less value it has, which in time buys us less, which means we need to make more to keep up with the lifestyle that used to cost us less.  In essence, costs rise, which means wages rise, and we have inflation!  Once the inflation rate rises, the Bank of Canada raises the Prime Lending Rate, and interest rates rise.  How long will it take for inflation to catch up if Quantitative Easing is in introduced, it is hard to predict.  Economists around the world have argued and continue to argue this.  

What does all of this mean to someone with a mortgage, or looking to find a mortgage?  In essence, no one knows how long these low interest rates will be around for.  We are all celebrating the low interest rates of today, but we need to be careful as these historically low rates will not be here for forever!