Canada’s aging population may be the reason that rock-bottom interest rates haven’t kickstarted inflation, or the economy, suggests a report from the C.D. Howe Institute published Tuesday.
Annual inflation has averaged just 1.5% over the past 10 years, coming in under the Bank of Canada’s 2% target, despite the bank’s efforts to boost inflation with highly stimulative monetary policy, the report from the Toronto-based think-tank says.
The report suggests that the aging population may be one reason for this, as older households tend to take on less debt, and are less sensitive to changes in borrowing rates.
“Canada’s aging population is likely a leading cause of the systematic undershooting of inflation we have seen since the financial crisis,” says Steve Ambler, one of the report’s authors, Steve Ambler, in a statement. “Specifically, an aging population that takes on less debt is less sensitive to changes in the interest rate.”
Low interest rates boost household spending and inflation, the report finds but that the impact is weaker when households are not as indebted, which is typically the case for older households. Monetary policy would have been more effective, the report suggests, if not for Canada’s aging population.
“If further population aging continues to reduce the effectiveness of monetary policy, this could eventually undermine Canada’s inflation-targeting regime,” Ambler says.