If the interest rate was zero, would you borrow more?

The Bank of Canada hopes the answer to that question is a resounding yes. But here's the funny thing about borrowing money: Whether your rate is zero per cent or 10 per cent or 50 per cent, you still have to pay the money back …

The Bank of Canada made a bet Tuesday that, if interest rates were virtually zero, businesses might be more inclined to borrow to build new factories, buy new equipment, and put unemployed Canadians back to work.

The central bank lowered its key overnight rate Tuesday to 0.5 per cent — a record low — and many observers say the bank could even take the rate as low as it could go, to zero, in all all-out effort to make it cheaper and easier for commercial banks to lend money and spur economic growth.

Several commercial banks did lower some of their interest rates within hours of central bank's announcement.

But the new, lower rates are unlikely, by themselves, to get the economy moving again.

“You can have the cheapest money in the world, but if people keep reading about the layoffs and falling housing prices, that takes away confidence and makes people much more cautious about borrowing, and leaves all the stimulus that you're trying to put in place basically on the sidelines,” said Warren Jestin, chief economist at The Bank of Nova Scotia. [Read the rest of the story]

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