The zero rate bound

What is the difference between 0.25% and 0.1%? A 60% drop in the short term interest rates!

Apparently that is the logic of the Bank of Canada mulling a decrease in the target rate, which is currently at 0.25%.

In November, the Reserve Bank of Australia cut its policy rate by 15 basis points to 0.1%, while the Bank of England did the same last March.

While this may not seem like a lot, the mathematics of division when you get close to zero gets really fun. If your limitation is interest expense, then reducing the interest rate by 60% means you can borrow 2.5x more money!

This is a luxury that nations with their own sovereign currencies can perform. In Canada, despite the federal debt ballooning over $1 trillion this fiscal year, public debt charges peaked in 1995-1996 at nearly $50 billion. For the 2020-2021 COVID-19 fiscal year, that interest bite is expected to be about $19.5 billion (table A2.4)!

The low interest rate environment ends when the demand for currency starts to abate and one trigger to this is the onset of inflation.