While central bankers may have little choice but to keep rates low, given the weak economic recovery and the range of serious risks markets face, a long period of low rates has its own consequences, too.
In a research note BMO Capital Markets warns that, although the prevailing wisdom suggests that the Bank of Canada is right to keep rates low, “the policy does carry a variety of important risks which should not be lightly brushed aside.”
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The risks it sees from having rates very low for a long period of time include: encouraging households to take on potentially excessive debt; inflating a housing bubble; discouraging saving; encouraging inappropriate risk taking; threatening the health of pension plans; and, the risk of sparking inflation.
“Ultimately, an extended period of negative real interest rates is a heavy punishment for savers and a juicy reward for debtors,” BMO concludes. “Can there be any doubt that the end result will be a household sector that is overburdened by debt and undersupported by savings?”