Effects Of Falling Interest Rates On The

Canadian Economy Essay, Research Paper

The Canadian economy is a complicated and important issue for all Canadians because it affects everyone. It is also important for us to be informed about the economy in order to be better prepared and equipped to deal with the problems. The economic issue discussed in this essay concerns the current reductions in interest rates. Firstly, this essay will discuss the short term effects that are expected. And secondly, it will discuss the possible outcomes that may be caused by the low interest rates.

The interest rates in Canada are at their lowest since 1963, and are expected to fall even more. There is a benefit to consumers; thousands of dollars have been slashed off mortgages ($3000 less/yr on a $100 000 mortgage) and hundreds ($500 less/yr on a $15 000 car) from the costs of financing a car purchase. The Bank of Canada decision to reduce the prime rate made way for cheaper loans for corporations and businesses. This may encourage entrepreneurship as well as more investment in Canada. But, households will also be positively affected, Canadians, over the years have accumulated very large debts of approximately $467 000 000 or $43 000 per household. The lower interest rates should make repaying easier because more of the repayments are used to reduce the principle debt other than only being used to pay interest. As long as the interest rates stay low, there will be more consumer spending and more jobs will be created.

For now the low interest rates seem to bring good news of a better economic future, but it is very important to assess and anticipate all economic possibilities, good or bad. Scenario A: Canadians are aware that the interest rates are at their lowest in decades. This will stop them from saving their money because they will receive virtually no interest income. Within months incomes, employment, and production in the country will probably increase because everyone is spending their money, and not saving. The rise in incomes will cause more spending in Canada, but will also cause more Canadians to leave the country for vacations or luxuries. Even though this increase in foreign spending will cause less money to be spent in Canada it may benefit us by keeping some form of control on over spending in the country. In scenario B: the low interest rates spark a spending fury which in turn causes the economy to dramatically improve itself. While the economy is good people keep spending until it causes massive inflation. The large raise in interest rates causes job losses, decrease in production and less consumer demand. Then, in order to combat the inflation the interest rates must be increased. The increased interest cause the economy to stabilize but not at the previously good level.

The effects of the interest rate reductions may cause unbelievable benefit to the Canadian economy and it’s people. It has the potential to change the whole country for the better, economically. Lower interest rates can decrease the costs of loans making large purchases more affordable as well as entrepreneurship and educational loans more affordable. Yet these interest reductions may also cause careless spending and economic disaster. It would be impossible to predict all the economic implications in the future or even to make a reasonable attempt; but if an attempt is made at trying to understand that there will be effects and that there is great diversity in these effects, a great step forward is achieved which is contrary to not attempting to accept the fact that changes such as disaster, or even prosperity is an unavoidable possibility.

Economic Definitions

1) Short Term Rates and Long Term Rates:

A short term rate is an interest rate set by a financial institution, or central bank, for loans that are repaid in a short period of time. Possibly between 1-3 years.

A long term rate is an interest rate set by a financial institution, or central bank, for loans that are repaid in a lengthy period of time. Possibly 5+ years

2) Inflation:

Inflation is a term used to describe a general increase in prices.

3) Prime rate:

The prime rate is a cost of borrowing charged by the bank to it’s most reputable (creditworthy) clients such as large businesses or corporations.

4) Imports and Exports:

Imports are materials or services a country purchases from another country.

Exports are materials or services a country sells to another country.

5) Central Bank:

A central bank is a institutions that assists in maintaining the value of the country’s currency, proving a storing places for domestic and foreign chartered banks as well as providing larger loans for chartered banks and corporations.

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