Cheap Money and Careful Savers: What Low Rates Did, and Real Returns

For years, a careful family could do everything right and still fall slowly behind. They spent less than they earned. They avoided debt. They kept a healthy balance in savings, just in case. And while they waited, the money in that account quietly bought a little less each year.

Meanwhile, the neighbour who borrowed heavily to buy a larger house often watched its price climb.

Nobody in that story did anything wrong. That is exactly what makes it worth understanding.

The price of money, the interest rate, is not neutral. When it stays low for a long time, it rewards some habits and quietly taxes others. When it rises, the rewards shift. A family that understands this does not have to guess where rates are going next. It can ask a better question: whatever rates do, where does our own capital sit, and who earns on it?

That question protects a family far more than any forecast. And it begins with a simple distinction most people were never taught.

Let me start there.

What is the difference between a nominal return and a real return?

A nominal return is the rate written on your statement, such as 3% a year. A real return is what that money can actually buy after inflation, roughly the nominal rate minus the inflation rate. If an account pays 3% while prices rise 3%, your real return is about zero. Tax on the interest can push it below zero.

This is the most useful idea on this page, so let me make it concrete. All the numbers below are hypothetical, chosen only to show how the arithmetic works.

Now add tax. Interest earned outside a registered account is generally taxed as income. Consider a hypothetical saver earning 4% interest whose marginal tax rate is 30%. After tax, that 4% becomes about 2.8%. If inflation is 3%, the real return after tax is slightly below zero. The balance grows. The purchasing power does not.

Here is the contrast I want you to hold.

A growing balance is not the same thing as growing wealth.

Your statement shows dollars. Your life is lived in groceries, rent, tuition and fuel. The real return is the one that connects the two. When you compare any savings option, I suggest you ask three numbers instead of one: the rate, the tax on that rate, and the inflation rate over the same period.

The idea of opportunity cost sits right beside this one. Every dollar parked at a low real return is a dollar not doing something else.

What happened to interest rates in Canada after 2008 and in 2020?

After the 2008 financial crisis, Canadian interest rates stayed very low for years. In March 2020, as the pandemic hit, the Bank of Canada cut its policy rate to near zero. It then raised the rate sharply in 2022 and 2023 to bring inflation back toward its 2% target. As read on 5 November 2026, the policy rate was 2.50%.

Those are the broad strokes, and I will keep them broad. The exact path of every decision is published on the Bank of Canada's website, and it is better read there than repeated here.

What matters for a family is the shape of that history.

A long stretch of cheap money. For many years, borrowing was inexpensive and savings earned very little. Families who held most of their wealth in savings accounts and short-term deposits often earned interest that, after tax, did not keep pace with prices.

A sudden emergency. In 2020 the policy rate fell to near zero, and the Bank of Canada also bought large amounts of bonds. Its balance sheet grew from $120 billion on 11 March 2020 to a peak of $575 billion on 10 March 2021. The sister page on quantitative easing explains what that meant.

A sharp turn. When inflation rose well above target, the Bank of Canada raised its rate quickly in 2022 and 2023. Borrowers who had grown used to cheap credit felt it at renewal. Savers, for the first time in years, saw meaningful interest on deposits again.

The lesson is not that rates will repeat this pattern. The lesson is that they can move further and faster than most households plan for, in both directions. The page on who sets interest rates in Canada explains how those decisions are made and how they reach you.

Who gains when interest rates are low?

When rates stay low, borrowers gain because their interest costs fall, and owners of assets such as homes, shares and bonds often gain because those prices tend to rise when rates fall. Businesses can borrow cheaply to expand. Governments carrying large debts pay less interest. Savers who rely on interest income usually gain least.

Why do asset prices tend to rise when rates fall? Think about how a buyer values anything that produces income or can be financed.

If a mortgage costs less each month, a buyer can afford to borrow more for the same monthly payment. More buyers bidding with larger loans tends to push prices up. If safe savings pay very little, investors look elsewhere for income, and their demand lifts the prices of other assets. And when the rate used to value future income falls, the value placed today on that future income rises.

So in a long period of low rates, the people who already owned assets, or who could borrow to buy them, often found their net worth rising without doing anything new. That is not a moral judgment. It is arithmetic meeting human behaviour.

Here is who generally tends to gain, in broad terms:

• Borrowers with variable rates or upcoming renewals
• Owners of homes and other property
• Holders of shares and long-term bonds
• Businesses able to borrow to expand
• Governments carrying large debts

And here is the contrast.

Low rates reward those who own and those who borrow. They ask the most patience of those who save.

Who loses when interest rates are low?

Savers who keep their money in deposits and depend on interest income tend to lose the most when rates stay low. Retirees living on interest, young families saving for a down payment, and anyone holding a large cash cushion can see their purchasing power erode, because the interest earned after tax may not keep up with inflation.

Consider a hypothetical retired couple who planned to live partly on the interest from their savings. When rates fall, that income falls with them. To keep the same lifestyle, they may need to spend some of their capital, or take on more risk than they ever intended to, simply to earn what they used to earn safely.

Consider a hypothetical young family saving for their first home. While they save, low rates may be pushing home prices higher. Their savings grow slowly, and the target moves away from them faster than they can close the gap.

Neither family did anything foolish. They followed the old advice: spend less than you earn, and save the difference. Low rates did not punish that advice. They simply stopped rewarding it as they once had.

This is why I talk so much about where capital sits. The habit of saving is still the foundation of every sound family plan. What changes with the rate environment is how much that saved capital earns, and who earns on it.

Who gains and who loses when rates rise?

When rates rise, savers and lenders tend to gain because deposits and new fixed-income products pay more. Borrowers, especially those with variable rates or renewing mortgages, tend to lose because their interest costs climb. Owners of assets that were bid up by cheap credit can see prices stall or fall, while new buyers may find prices easier but borrowing harder.

Rising rates flip much of the picture above.

There is a subtle point here. Rising rates usually happen because inflation has already risen. So a saver may see a higher rate on paper while prices have climbed even faster. The real return, rate minus inflation, can still be low or negative for a while, until inflation settles back toward target.

And a second subtle point. A family is rarely just a saver or just a borrower. Many households have a mortgage and a savings account at the same time. Many retirees own a home and depend on interest. Each rate change pulls on different parts of the same household in opposite directions.

That is why a simple question helps: in our household, which force is larger, the interest we pay or the interest we earn?

What is the Cantillon effect?

The Cantillon effect is named after Richard Cantillon, an 18th century economist who observed that new money does not reach everyone at the same moment. Those closest to where new money or credit enters the economy can use it before prices adjust. Those further away tend to meet the higher prices first, and the extra money last.

Cantillon wrote long before modern central banks existed, but his idea still helps explain uneven outcomes.

Picture new money as water poured into one corner of a large pool. The level near the spout rises first. The far side of the pool rises eventually, but later, and by the time the water arrives, the level near the spout has already been high for a while.

In a modern economy, new money mostly enters through lending. The cluster's main page on how money is created in Canada explains that the majority of money is created when lenders extend new loans. Those who can borrow, and those who own the assets that borrowers buy, tend to be near the spout. A worker whose wage adjusts slowly, or a saver living on fixed interest, tends to be on the far side.

I want to be careful here. Economists still debate how large this effect is, how long it lasts, and how much it matters compared with other forces. It is a lens, not a verdict. But it helps explain why the same policy can feel generous to one household and quietly costly to another.

It also points to the question that a family can actually act on: over the long run, do we want to live near the spout or far from it? Owning productive capital is one way families move closer.

Is there a fair case for low interest rates?

Yes. Low rates can soften a recession by making it cheaper for families and businesses to borrow, refinance and keep going, which can protect jobs and incomes. They reduce the cost of carrying existing debt. And the Bank of Canada's aim is to keep inflation near 2%, which, over time, protects the purchasing power of everyone's savings.

It would be unfair to describe low rates only from a saver's point of view. Rates fall for reasons.

Jobs. When the economy weakens sharply, businesses cut back and people lose work. Lower borrowing costs can encourage businesses to keep investing and hiring. For a family, a steady paycheque usually matters far more than an extra percent of interest on savings.

Debt relief. Households carrying mortgages and lines of credit pay less interest when rates fall, which frees money for other needs.

Avoiding a spiral of falling prices. A broad, sustained fall in prices can lead people to delay spending, which deepens a downturn. Keeping inflation near target is meant to avoid both runaway inflation and falling prices.

Stable prices protect savers too. The same 2% target that sometimes means low rates is also the commitment that keeps inflation from eating savings quickly over the long run.

So the honest conclusion is not that low rates are bad. It is that every rate setting creates winners and losers at the same time, and that a careful family benefits from knowing which side of each trade it is standing on.

What can a careful saver actually control?

A careful saver cannot control interest rates, inflation or the Bank of Canada's decisions. A careful saver can control how much is kept in cash and for what purpose, how much high-interest debt the household carries, which accounts hold long-term savings, and whether the family owns capital that works for it rather than only renting capital from lenders.

Here are three questions I suggest a careful saver can ask, in this order.

First: what is this money for, and when will we need it? Emergency money needs to be safe and available. Long-term capital has different needs. Mixing the two is how families end up with too much in low-yield accounts or too little available in a crisis.

Second: what is the real return, after tax and inflation? If the answer is negative, the money is shrinking in purchasing power, even while the balance grows. That does not always mean it should move. Safety and access have value. But it should be a choice, not an accident.

Third: who earns on our capital, and who earns on our debts? Every loan you carry pays someone else. Every dollar you save is, in most cases, lent on by the institution that holds it. Seeing that flow clearly is the beginning of thinking like a lender.

For some families, part of the answer to the third question is a participating whole life insurance policy, designed and funded over many years. I want to be precise about what it is and is not.

It is insurance first; the death benefit is its primary purpose. Its cash value is not a savings account, not a deposit, not CDIC insured, and not an investment. Cash value already credited to a participating policy does not go down when markets fall. Dividends are not guaranteed, and a lower dividend scale slows future growth. The page on whether a policy's cash value can go down explains the difference between what is credited and what is projected. In the early years, the cash value is below the premiums paid, so it suits only families with years ahead and steady cash flow. A loan against the policy is made by the insurer, is a real debt that accrues interest, and should be repaid with discipline.

Used that way, it does not make anyone immune to interest rates. It changes who owns the capital.

What this page will not tell you

This page does not predict interest rates or inflation, recommend any account, investment or insurance product, or tell you how your own money should be divided. The examples are illustrative. Tax rates, registered account rules and inflation all vary by person and year, so your own after-tax real return can only be worked out with your own numbers.

It also leaves aside topics that deserve their own careful treatment: how registered accounts change the tax picture, how pensions and annuities respond to rates, how investment returns compare with deposit returns over long periods, and the many risks that come with investing. Each of those depends on your age, goals and tolerance for risk, and each belongs in a conversation with qualified professionals.

What this page offers is a way of seeing. Once you see real returns, you rarely look at a savings rate the same way again.

Who this does not suit

This explainer is general, and the ideas in its last section do not suit every household. A participating whole life policy does not suit a family that needs its money within a few years, has no emergency fund yet, carries high-interest debt without a repayment plan, has irregular cash flow, or has no need for life insurance.

For those families, the most powerful steps are usually the plainest ones: build an emergency cushion in a safe, accessible place; clear expensive consumer debt; and make saving a habit that runs automatically, before spending. Those habits matter in every rate environment. They matter most when rates are low and the temptation to borrow is high.

If you want to apply these ideas to your own family's capital, the page on owning your own pool of capital is the natural next step. It explains what it means for a family to build capital over decades, and what that honestly requires.

Important Disclosure: This page is general information and education only. It is not personalized financial, insurance, investment, tax or legal advice, and interest rates, inflation and tax rules change. All numerical examples are hypothetical. Life insurance is an insurance product, not an investment, and its cash value is not a deposit. Guarantees in a participating whole life policy are contractual guarantees of the issuing insurer, dependent on its financial strength and claims-paying ability, and are not government guarantees. Dividends are not guaranteed; they are declared by the insurer's board of directors and past dividends do not indicate future dividends. A policy loan is a debt to the insurer that accrues interest and reduces the net cash value and the death benefit if not repaid. The author is a licensed insurance professional who may earn a commission on the sale of insurance products.

Put simply: I cannot tell you where rates or prices will go, and I would be wary of anyone who claims they can. What I can do is help you see your own money more clearly. Before you change anything, sit down with an experienced licensed insurance professional who understands participating policies, an accountant who knows how they are taxed, and a legal advisor who understands your estate. And please know that if you buy a policy through me, I may earn a commission.

If you would like to talk through what this means for your family, I invite you to book a free 30-minute discovery meeting.