I have to admit, following the antics of the world’s central banks has been a bit of a bore the past few years. Since the end of the financial crisis (no, we are no going to debate whether there is a still a crisis going on), central banks have basically left interest rates at crazy- low rates. Meeting after meeting, they announce that rates are going to stay at those crazy-lows until things improve. And so it goes on.
Lately, however, things have been improving. The economic signals in the U.S., and in Canada too, have been getting better. Accordingly, there have been signs that the U.S. Federal Reserve, amongst other central banks, is close to reversing policy and letting rates go higher.
The Fed may well let interest rates rise, and eventually the Bank of Canada might do so as well. However, in an interesting speech camouflaged as yet another dull pronouncement by a central banker, Bank of Canada second-in-command Carolyn Wilkins today announced something a little bit radical. Here are her words, but I’ll provide a translation from the central-bankease in a minute:
“The bottom line is that potential output growth in Canada and other industrialized economies will be lower than it was in the years leading up to the crisis”…”Our most recent estimate for Canada is that it will average just below 2 per cent over the next two years. This is a percentage point lower than average potential growth in the decade prior to the crisis…We estimate that the real neutral policy rate is currently in the range of 1 to 2 per cent…This translates into a nominal neutral policy rate of 3 to 4 per cent, down from a range of 4 1/2 to 5 1/2 per cent in the period prior to the crisis.”
Translation: The post-crisis world is a slower growth world because of structural changes and because an older population means slower growth. Accordingly, to keep growth at a non-inflationary level, you can have lower interest rates, all things being equal, than you could before the crisis. Pre-crisis, a little growth would get the central banks ratcheting up the rates. Post-crisis, they will not worry about the inflationary impact of growth as much.
Translation of my translation: The U.S. and Canada are going to enjoy lower interest rates, all things being equal, in the post-crisis world than they did in the pre-crisis world
Let’s think about the implications of long term low interest rates. They are positive for the bond market. They are positive for housing markets, and for those wanting to enter it. They are good for businesses looking for capital.
What are long term, low interest rates are not good for? They are not good for the mental health of those baby boomers who want to throw their (not large enough) savings into some kind of safe savings vehicle and know that they are getting a decent return, no questions asked. On the contrary, boomers (and everyone else) are going to have to work harder than ever to find good returns for their money.
Ms. Wilkins may be wrong, of course, and interest rate forecasts can turn on a dime. Still, if she has the larger story right (and it is the same one that economists such as myself have been telling for a long time) then you can add the reality of low interests rates to the list of things that the aging boomers will no doubt lose sleep over.