Personal Finance

What, if anything, would make interest rates go up?

  • Last Updated:
  • May 7th, 2020 7:21 pm
[OP]
Newbie
Oct 17, 2011
57 posts
17 upvotes

What, if anything, would make interest rates go up?

We've had low interest rates for the past 10 years since the last financial crisis, causing record household debt levels and contributing to skyrocketing housing prices year after year. Do you guys think that the rates should have been raised sooner?

Did they have to stay low because of the debt levels and households not being about to service the debt if rates had raised? Or is it because real estate is the largest contributor to Canada's GDP and it couldn't afford to take a hit?

Also with all of these measures that the government have implemented to try to keep the economy afloat, could it potentially trigger higher inflation when consumers begin spending again? If we did see higher inflation, would the government raise interest rates to combat? Will the government ever raise rates with the debt trap Canadians are in?

Curious to know your thoughts on this.
14 replies
Member
Dec 28, 2017
296 posts
110 upvotes
Burlington
If government increase interest rate.. their debt will also have a higher interest rate .. hence, they cannot pay the interest to the now increased debt from the virus .

I can only see two ways where interest rate will increase higher than pre covid.

1) Canada lower debt to at least pre covid level - will never happen

2) Canadian dollar lose its value worldwide into hyperinflation.. this will happen in the future
Deal Addict
May 16, 2017
1561 posts
1964 upvotes
Unlike the extremist view of the previous post - the BoC will adjust interest rates base primarily upon inflationary pressures like they have for the last few decades. Except for short-term shocks, like 2008-9 and now, where rates fluctuate rapidly, that is the way it will be. The BoC isn't out to save consumers' from their debt nor prop-up a single economic sector. In fact, a controlled rise in rates will lead to some foreclosures, which will also result in lower housing demand and a reduction in inflationary pressure - self-correcting.

Also, the previous post makes a simplistic assumption about the impact of near-term interest rates increases on the debt services costs. The Federal Gov't uses primarily medium-to-long term bonds to finance federal deficits these are often in the 20-year range (but can range between 2 - 40 years), so, no, the rise in interest doesn't make the existing debt immediately more costly. It will make re-financing expiring debt and new short-term financing more costly though.

Canada has had much higher GDP-Debt ratios in the past and corrected course, there is no reason to think future course corrections can't be made again with the right motivation. The Liberals under PM Chretien and Finance Minister Martin made some of the toughest cuts ever, so, even a Liberal gov't could do it.

Maybe we're economically addicted to low interest rates, but I don't think they can be sustained forever; maybe a small inflationary shock would be good for a reality check.
Member
Dec 28, 2017
296 posts
110 upvotes
Burlington
Your logic makes sense, but please show me in the past 20 years, did interest rate ever surpassed a pre crisis rate?
Ever since Asian tsunami, tech bust, 9/11, great recession , and today... Canada never managed to surpassed previous pre crisis rate.

You are correct by the textbook, but reality begs the differ.

Do you think we will ever have 25% interest rate and 5 years mortgage aromatization?

Western governments are addicted to low interest rate as they are addicted to debt .. and Canada needs to cut government spending in order to produce budget surplus to pay debt... To produce budget surplus, you need cuts in spending .. I haven't seen a permanent cut in 20 years as Canadians cry wolf when government wants to lower their debt .

So yes, in theory, you are absolutely correct ....you also forgot to mention government have to be fiscally responsible and have a surplus either through higher taxation or lower spending. Our government currently have higher taxation accompanied by even higher spending .

Theory you are right.. but reality begs the differ
Deal Addict
Nov 13, 2013
2432 posts
1202 upvotes
Ottawa
ayufan wrote: Your logic makes sense, but please show me in the past 20 years, did interest rate ever surpassed a pre crisis rate?
Ever since Asian tsunami, tech bust, 9/11, great recession , and today... Canada never managed to surpassed previous pre crisis rate.

You are correct by the textbook, but reality begs the differ.

Do you think we will ever have 25% interest rate and 5 years mortgage aromatization?

Western governments are addicted to low interest rate as they are addicted to debt .. and Canada needs to cut government spending in order to produce budget surplus to pay debt... To produce budget surplus, you need cuts in spending .. I haven't seen a permanent cut in 20 years as Canadians cry wolf when government wants to lower their debt .

So yes, in theory, you are absolutely correct ....you also forgot to mention government have to be fiscally responsible and have a surplus either through higher taxation or lower spending. Our government currently have higher taxation accompanied by even higher spending .

Theory you are right.. but reality begs the differ
No as he said they control inflation. For a variety of reasons we have had almost no inflationary pressure for the past 30 years. Even when the economy was booming. The 2018-19 increases were an attempt to return to normal and were helpful so the bank had room to cut when this arrived unlike Many other central banks.

If supply chains collapse or QE finally catches up with us and inflation starts yes we could see 20% rates. Seems very unlikely. With such low inflation expectations even 5% would cause massive deflationary pressures as a result of economic damage that would arrive.
Deal Addict
Jan 21, 2018
4356 posts
4416 upvotes
Vancouver
A 2015 retrospective on the spectacularly high interest rates of the early 1990s and why it happened than and "couldn't" happen today:
https://www.theglobeandmail.com/real-es ... e24398735/

Unless of course something really unusual happened...

In that case you may be going back over that article and shaking your head over the complacency and overconfidence.
Deal Addict
Dec 4, 2016
1873 posts
892 upvotes
Globally? Wage inflation, probably. Wage inflation causes general inflation to escalate, as workers build inflation expectations into their wage negotiation. Last time this happened, labor unions were a big thing.

For a particular nation? If the government prints more money than the rest of the world, the currency might weaken, forcing its central bank to increase interest rates. Canada is a long way from that.
Deal Addict
Sep 19, 2009
2067 posts
862 upvotes
Toronto
fogetmylogin wrote: For a variety of reasons we have had almost no inflationary pressure for the past 30 years. Even when the economy was booming. The 2018-19 increases were an attempt to return to normal and were helpful so the bank had room to cut when this arrived unlike Many other central banks.
I guess the trick is to have a smart national statistical agency which will scientifically show us that doubling the price for houses on average every 6 years, actually lowers the Consumer Price Index.
Deal Addict
Jun 27, 2006
1679 posts
1966 upvotes
Let's not forget lower rates makes the stock market more attractive on several fronts including stock buybacks which has led to one of the longest bull markets in history until recently. It may have been smoke and mirrors to the extent of the disconnect between Wall Street and Main Street but it was also important for governments be say look at the great work we have done especially south of the border. An upward correction will come eventually but looks like the system hasn't reached that point yet.
Deal Addict
May 16, 2017
1561 posts
1964 upvotes
ayufan wrote: Your logic makes sense, but please show me in the past 20 years, did interest rate ever surpassed a pre crisis rate?
Ever since Asian tsunami, tech bust, 9/11, great recession , and today... Canada never managed to surpassed previous pre crisis rate.

You are correct by the textbook, but reality begs the differ.

Do you think we will ever have 25% interest rate and 5 years mortgage aromatization?

Western governments are addicted to low interest rate as they are addicted to debt .. and Canada needs to cut government spending in order to produce budget surplus to pay debt... To produce budget surplus, you need cuts in spending .. I haven't seen a permanent cut in 20 years as Canadians cry wolf when government wants to lower their debt .

So yes, in theory, you are absolutely correct ....you also forgot to mention government have to be fiscally responsible and have a surplus either through higher taxation or lower spending. Our government currently have higher taxation accompanied by even higher spending .

Theory you are right.. but reality begs the differ
Maybe you just haven't lived long enough yet - 20 years is nothing in terms of a basis of comparison or personal experience of what it means to actually go through a variety of financial crises. I lived through the previous "reality" where mortgage rates were in the 20% range and survived as did the country. No need for doom and gloom and extreme A-or-B responses. Yes, there could be future pain but that doesn't mean hyperinflation, depression or some other extreme financial outcome are inevitable or necessary.
Deal Fanatic
Oct 7, 2007
8101 posts
4075 upvotes
If Canada's debt rating suffers, could this impact interest rates?

There is a story being discussed in other forums regarding Canada maybe not doing a 2020 budget or some uncertainty about when we might see a budget. Not sure how that works in terms of Canada continuing to maintain first world status.
https://www.theglobeandmail.com/politic ... -pandemic/
Sr. Member
Mar 1, 2020
573 posts
185 upvotes
GTA West
Interest rate will be higher than now but I doubt it seriously goes even to mid single digits range (eg for savings/GICs)... This massive "stimulus" will be "reversed" when the economy gets better.

As well, just looking at the developed economies like Japan, US, and even diring the best of times, they had a hard time reflating the economies... The financial crisis never even led to any fear of double digits inflation (and the corresponding rate increase and that was a balance sheet recession).

I'm of the view that the moral hazard that this has created have led to people expecting easy and cheap $ forever... Net there's no inflation that will happen as a result as the central bankers globally will just turn on and off the switch to deflates/reflate... Gotta consider the demand side too btw... People are aging etc...

Truth be told, too much variables to mention and consider just to type here in a thread and from a phone at that lol... But, those are general points... This can be debated to high heavens but I doubt the central bankers let this become uncontrolled.... heck investing in the stock mkt is a no brainer esp this time as a result of all the CB actions...
Sr. Member
Mar 10, 2004
650 posts
214 upvotes
BlueSolstice wrote: Globally? Wage inflation, probably. Wage inflation causes general inflation to escalate, as workers build inflation expectations into their wage negotiation. Last time this happened, labor unions were a big thing.

For a particular nation? If the government prints more money than the rest of the world, the currency might weaken, forcing its central bank to increase interest rates. Canada is a long way from that.
True. This explains why china is resisting the temptation to provide the type of subsidies you are seeing here in canada. We need china to print money to equalize.
Deal Addict
Nov 13, 2013
2432 posts
1202 upvotes
Ottawa
andrew4321 wrote: I guess the trick is to have a smart national statistical agency which will scientifically show us that doubling the price for houses on average every 6 years, actually lowers the Consumer Price Index.
Well prices are no where near doubling every six years over a long period of time. Canada is more than Toronto. Lower interest rates mean people are spending less on housing to buy the same priced house.
Inflation is low across the board on average. Furniture and clothes and some other products are much cheaper in real dollars and actually in a lot of cases straight priced lower. Electronics is a tricky area. It shows as cheaper because a 32 inch TV is a fraction of what it would have costed previously. Of course now we have 65 inch TVs so the typical family spends more on a TV than before. The housing, education inflation is real though and certainly a cause of stress. It is no clear raising rates more would do much to mitigate that though. In short term would certainly exacerbate the problem.
Member
Dec 28, 2017
296 posts
110 upvotes
Burlington
Inflation does not mean price goes up. In order to make other feels like their price are not rising, many companies impose hidden inflation while keeping the product price the same.

I.e. different packaging on product which gives less than previously like chips , ketchup , candies
Clothings could use less materials, i.e. instead of using 2lb of cloth on pants, they will use 1.8lb of cloth to make the same pants resulting on lower quality (easier to rip)
Cheaper material to make electronic goods to lower overall cost. Some electronics breaks easier than before

Low interest rate will decrease savings and inflate asset price . For housing, if you are looking to pay 3000 a month on a house, 5% interest rate will net you a lower value house vs. 1% interest rate.

Many pension funds (CPP, TPP, etc) and insurance companies requires high interest to maintain their payouts . Low interest rate will push these companies to buy risked assets for a yield to maintain their forecasted payment vs. the traditional bond holding. Companies will either increase their risk or increase premiums if they need to maintain payouts.

The downfall is huge, i.e Rieman Marcus filed for BK today , CPP bought $6B worth of its stock before while they were chasing yields . If interest rate was high, they would buy safe bonds that offers high rates.

When market have low interest rate for an extended period of time.. many government and companies would borrow excessive money to fund operations or stock buybacks .. however, once interest rate increase, companies will have issues to service these debts.


Ultimately, this is the reason why you will never see interest rate ever increase more than pre crisis rate.
Only hyperinflation and loss of value in the currency would increase interest rate . This is reality ... Unless all of a sudden, everyone decides to repay their debt or go BK together

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