Effects of Falling Interest Rates on the Canadian Economy

Essay by Anonymous UserCollege, Undergraduate October 1996

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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...