Leong: Why we shouldn’t be surprised interest rates likely won’t drop

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One of Canada’s top central bankers warned last week we shouldn’t expect a return of the ultra-low interest rates of the recent past.

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In turn, what Bank of Canada senior deputy governor Carolyn Rogers said shouldn’t really have surprised anyone.

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“It may be tempting to believe the low rates that we all got used to will eventually come back. But there are reasons to think they may not,” Rogers said in a speech, as reported by The Canadian Press.

She went on to cite a number of reasons why, including a looming spending spree by retiring baby boomers, higher government debt and a number of global issues, including the current Israel-Hamas war in Gaza.

But while everyone’s concentrating on managing the future effects of higher interest rates, it’s easy to forget about the past — and the reason why we ended up with super-low interest rates in the first place.

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That would be a financial meltdown starting in 2007, sparked by a mortgage lending crisis in the United States.

The resulting economic slowdown was the worst since the 1930s, becoming known as the Great Recession.

Desperate to kickstart the global economy, central banks everywhere began dropping their interest rates to levels unheard of to that point in modern times.

In Canada, they slipped to under 1%, with rates slowly trending toward 2% by 2018.

When the COVID-19 pandemic struck, interest rates went through the floor again.

Interest rates would rise above 2% by July 2022. In the 12 months since, they’ve reached 5% — levels not seen since 2001.

But let’s look at it another way: for the last 14 years, we’ve been living in an economy fuelled by incredibly cheap money.

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While we came to believe this was normal, it was much more likely to have been an anomaly.

Current economic worries partly caused by poor financial literacy, banks’ eagerness to lend

With the cost of borrowing returning to something resembling normal, some of us are now paying the price for having bitten off more than we could chew when lending was happening fast and loose at dirt-cheap prices.

I can imagine a number of homebuyers happily accepting the largest possible mortgage offered by the bank, not realizing that if interest rates were to rise, it could cause grave financial hardship.

With interest rates close to zero from 2009 until 2022, it wasn’t a question of whether rates would go up. Rather, it was always a question of when it would happen.

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And now that they are finally rising, I suspect we are on the cusp of yet another economic reckoning centred on consumer lending for home purchases — possibly a result of insufficient financial literacy, coupled with financial institutions too eager to lend.

Still, things could be worse: As much as we think of today’s interest rates as being high, I suggest talking to someone in your circle who bought a home in the early 1980s.

Back then, interest rates peaked at almost 18% in 1981. Mortgages were pushing well past 20%, according to my parents’ recollection.

After another, smaller interest spike in the late ’80s, things calmed down by 1991 when rates fell below 10%, reaching as low as 2.5% in 2004 before rebounding a little over the next several years.

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Central banks raise interest rates to cool inflation and slow the economy — and in doing so, it is also meant to give people an incentive to save.

You could leave your money at the bank and bankers would pay you for the privilege of hanging onto your hard-earned cash.

But when interest rates dropped during the Great Recession, banks stopped paying any meaningful interest for most savings.

For much of the past decade and more, there was no good reason to keep money in a bank account or in guaranteed investments.

So we didn’t. We spent it — and when we ran out of cash, we borrowed at low rates and spent more.

It was the economic stimulus the people in charge wanted, and consumers happily obliged … perhaps too happily.

And now, the bill is coming due for everyone.

rleong@postmedia.com

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