Those who follow the moves made by the Bank of Canada and the Federal Reserve in the U.S. may be left wondering what to make of the stimulus measures put in place by these central banks.
Last month, the Bank of Canada announced it will be keeping its 0-0.25% range for the overnight lending rate banks pay, until the 2% inflation target is hit.
The central bank also announced it would continue to buy $5 billion in government of Canada bonds weekly, in a bid to shore up bond markets which have had liquidity issues recently.
Similar moves in the U.S. by the Federal Reserve are in place to support the functioning of financial markets and ensure another 2008-like financial crisis does not take hold.
These stimulus measures, while perhaps necessary to support the healthy functioning of financial markets in North America, beg the question: will financial markets require indefinite stimulus to function?
Interest rates are at or near historic lows in most countries (in large part due to central bank bond buying) making government borrowing cheap. However, if inflation does take hold, the interest payments on this debt could become onerous.
Like governments, my advice to individuals today from a personal finance perspective is to avoid taking on too much debt during this period of record-low interest rates.
We’re at or near the effective bottom for interest rates, so borrowing too much could be dangerous if interest rates do rise again. Now is the time to be cautious and defensive, rather than reckless.
Invest wisely, my friends.
