Demographics and Interest Rates

The Bank of Canada apparently surprised many earlier this month with a second cut to interest rates this year to a historic low of 0.50%. Many appear to believe/hope/predict that rates are now abnormally low and will soon return to more normal levels. Not so fast.

Government fiscal mismanagement, global bank conspiracies, and money printing aside, one dynamic that doesn’t get talked about much in the current environment of supressed interest rates is the impact of demographics, or the statistical data relating to population and the particular groups (by age) within it. Most likely because it’s not anything you can blame any particular group for and is near impossible to sensationalize.

Young people are generally borrowers. Middle aged and old people are generally savers. Overall population growth and its fluctuations determine the relative number of (net) savers and borrowers in the population of a country. This relative number of savers and borrowers naturally has an impact on the market of loanable funds. Its economics 101: supply and demand.

People are living longer due to advances in medicine, science and healthcare. This is a good thing. However, one of the unintended consequences of such positive advances is those living longer (savers) find themselves on the wrong side of the supply/demand equation when it comes to interest rates, minimizing their return on savings. These victims of low return rates on savings are mostly products of the Baby Boom generation, born between 1946 to 1965.

There is some small hope on the horizon however as the number of Millennials (born between 1981 and 1997) will surpass the baby boom generation in size this year while the Gen-X population (born between 1966-1980) is expected to outnumber the Boomers by 2028. If there is anything to add some upward pressure on interest rates it lies with the Millennials and the hope that their appetites for borrowing and debt during their accumulating years of ‘stuff’ will be as insatiable as their Boomer parents and grandparents.