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By: Dana Wagner on
Bill Morneau, Finance Minister and MP for Toronto Centre, in an interview on March 26, 2016
It’s true we’ve got the lowest interest rates – or cost of government borrowing, measured by bond yields – in a long time.FactsCan Score: True
Explaining the decision to borrow deeper, Bill Morneau, the finance minister, said in an interview with CBC, “we’ve got the lowest interest rates in history.”
Interest rates impact the price of borrowing and the return on saving. The lower the interest rate, the lower the costs of borrowing. So if Morneau is right, the fact that borrowing is at its cheapest could help the government defend its deficit. (That’s debatable – just because interest rates are low does not mean it’s good to borrow.)
On the numbers, is the Minister right?
About all these interest rates …
The problem with checking out Morneau’s statement is that there are many interest rates. There’s one called a “benchmark” or “overnight” rate set by the Bank of Canada, which is the price for banks to lend each other money, but only for very short periods of time – one day.
Because we’re measuring government borrowing, the overnight rate doesn’t work.
“The overnight rate, although an important variable in the determination of all interest rates in Canada, is not that the main determinant when it comes to the cost of government borrowing,” said Jean-Paul Lam, an economist at the University of Waterloo.
Governments borrows for longer time periods, Lam explained, and that makes the interest rates on Government of Canada bonds the more accurate benchmark. The bond rate or “yield” is the price investors get paid by the government for loans of two, five or ten (etc.) years.
Nick Rowe, an economist at Carleton University, explained that with bond rates, “we would be comparing like with like, over a long period.”
(Just before moving to bond rates – if anyone claimed that the overnight rate is the lowest in history, they would be wrong. The current rate is among the lowest at 0.5 per cent. But it’s not the lowest. In 2009, after the recession hit, the rate mostly sat at 0.5 per cent, but dropped to 0.25 per cent in April).
Longer-term bond rate
Looking back at various government bond yields since the early 1980s, when Statistics Canada data begins for a few key rates, there’s a clear downward trend. Borrowing for government got a lot cheaper over the past several decades. That’s true for two-year, five-year and ten-year bond rates.
Source: Statistics Canada
Older data exists for some average bond yields, including maturity of one to three years. Here too, since 1945, the current rate remains the lowest.
Real interest rate
A twist to this story is that the downward bond yields are not adjusted for inflation. In other words, they are “nominal” interest rates and do not show the real value of the borrowing price tag.
“Trends in nominal interest rates are not necessarily reflected in real interest rates,” said Matthew Doyle, another University of Waterloo economist. “Canadian real interest rates were negative during parts of the high inflation years of the 1970s and early 1980s.”
Take for example the adjusted interest rates – for shorter-term lending than bonds – in the graph below.
Source: World Bank
However, when bond yields are adjusted for inflation, we get the same result: A downward trend for both real and nominal. “Real interest rates on two, five and ten year bond rates are also at their historical lows, at least since the 1980s,” Lam said.
Even if the picture was different, nominal rates may still be the most logical benchmark. Why not use the real interest rate? Adjusting for inflation is simply not common. “When people talk about ‘interest rates,’ without specifying real, they are normally understood to be talking about nominal,” Rowe said. That’s especially true for financial institutions, Doyle added, which use nominal for their balance sheets.
For both nominal and real bond yields, Morneau is correct. The current rate is the lowest in recent history, at least as far back as the data goes.