Up until last year, whenever I wrote a story about interest rates, I would warn readers to prepare for higher rates in the future. My best advice was to pay down your debt as fast as possible because it could get more expensive in the near future. Even up until the end of 2018 most economists were calling for up to four rate hikes by the Bank of Canada in 2019.
But all of that has changed.
Recently, the U.S. Federal Reserve cut its interest rate by 25 basis points, to a target between 2 and 2.25 percent. This was the first rate cut by the U.S. central bank in more than a decade. The last time the U.S. Federal Reserve announced a rate cut was in December 2008 during the depths of the Great Recession.
Following that, a Danish bank announced the world’s first negative interest rate mortgage. Denmark’s third largest bank, Jyske Bank, now offers 10-year mortgages at –0.5 percent. They pay borrowers to borrow money.
On the other side of the globe, China has announced new interest rate reform. For Chinese borrowers rates will be set once a month. It’s called the Loan Prime Rate (LPR). The rate will be based on medium-term loans, experts there say this will ultimately mean lower rates for borrowers. The move is to help support corporate borrowing and stimulate a slowing Chinese economy.
Elsewhere in Europe, rates are near or below one percent.
Back on our soil, the Bank of Canada is now under pressure to lower its rate in order to stay in step with the U.S. Federal Reserve. Economists are now pricing in a 20 percent chance of a rate cut in September. Forecasters say the chance of a rate cut by the end of the year is almost 100 percent.
Wherever you look, money is cheap and getting cheaper.
For consumers this can mean a higher cost of living if inflation increases. But for those saddled with debt, many may find comfort knowing the cost to manage their debt will stay lower for longer.
But despite money staying cheap the advice to pay down debt remains the same (pay your highest interest debt first). As central banks around the world scramble to stimulate the economy, the threat of an economic slowdown or recession remains front and centre. Central banks cut rates when they need to stimulate spending, and that generally only happens when the economy is slowing.
With a decelerating economy comes job losses and stagnant wage growth. All of that can affect a person’s ability to manage their debt.
Although rates might be expected to remain low for the long term, that does not mean consumers should take on more debt. For most, the best move (still) is to borrow within your means and take advantage of low rates by paying down non-tax-deductible loans quickly.