The bank of Canada in this article chose to maintain low interest rates to promote economic growth and stability, with a final goal of an expanded economy. Reducing the effects of high interest rates could be done by reducing the interest to equilibrium level, in sync with the current economic situation or a halting the current hikes to allow a corresponding economic expansion. Reduction in interest rates by the central bank encourages the business community to take more loans which are reinvested into the economy. The improvement in the investment improves economic growth as depicted by the increase in GDP from Y1 to Y2 as modelled in Fig. 2. Moreover, low interest rates increase aggregate demand encouraging firms to hire more labour, decreasing unemployment to a natural level.
The impact of the low interest rates are primarily the increased rates of borrowing. As stated in the article the low rates the Canadian central bank has enforced has massively promoted economic growth, the creation of jobs and expanded export sector. The low interest rate factor will promote businesses to invest in capital goods which in the long run results in expanded output and helping the economy through expenditure on products like automobiles and residential homes. Secondly, reduced borrowing rates increase the capacity of banks to lend as more money is available to their disposal. This results in the consumers finding themselves holding more cash than they wish, they react by increasing their incentive to save and increase consumption on various products and assets such as corporate equities and houses.
A limitation of low interest rates is its stimulation to save rather than invest. The increasing investment may not have significant impacts on the short run, but in the long run savers and the investors who heavily rely on interest income will be at a loss. A low interest rate has the effect of causing domestic currency depreciation. It makes investing money in the country’s economy less attractive as the return of investment is rather low in comparison to other countries with higher rates. This therefore results in a decline of demand for the subject currency in the long run.
The reduced interest rate is good for mortgage holders and borrowers because it encourages them to spend more. Although hurts savers who live on their savings because it decreases their disposable income resulting in a reduced expenditure. In conclusion, the interest rate hike is not crucial to the economy, taken that its effects will diminish with the economy’s growth, as well as the fact of seemingly stable rate of inflation and wage growth.