Canada could adopt negative interest rates within the next two years, Citi says

Canada could be among a handful of countries to consider negative rates of interest within the next 2 yrs as the European policy experiment gains popularity, says a brand new report from Citigroup.

The Bank of Japan earlier this year had become the fifth central bank to visit negative, which means it charges banking institutions to deposit money with it. The concept behind negative rates is that they make it expensive for hold cash, forcing businesses, consumers and banks to begin spending.

Citi economists, led by Ebrahim Rahbari, say within the report that Israel is likely to be the next bank to become listed on the negative rate club this season, but Canada, plus a few others, may also introduce such a policy within the next two years.

“In the Czech Republic, Norway and maybe Canada, a negative policy rate is not part of our central scenario, however the risk of an adverse policy rates are material,” write Rahbari and his team within their report.

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In the months following the financial crisis, many central banks in the planet introduced zero interest rate policies, or ZIRP, in an effort to get consumers spending and investing by looking into making borrowing cheap. Not doing this risked accelerating the crisis, as consumers would hoard cash, deflation would occur and aggregate demand would collapse, worsening a recession into a depression.



While zero rates helped return growth to the developed world, some economies have not had stellar results. Deflationary pressures still dog many European economies and growth remains anemic. Disappointing growth led the ecu Central Bank to adopt negative rates in 2014.

In a means, an adverse interest rate is an act of desperation. It punishes savers and rewards risk taking by making borrowing cheap – theoretically, banks could charge cash on savings deposits and even return money on loans.

In Europe, interest rates are already going further into negative territory. Sweden’s Riksbank announced Thursday that it is lowering its repo rate from -0.35 percent to -0.5 percent. Negative rates have made borrowing for consumers essentially cost-free, while driving down the worth of the Swedish krona immensely.

Unfortunately, as the central bank cut rates further, its policymakers also have pressured the Swedish government to introduce new regulations to cool Sweden’s ultra-hot housing market, which Riksbank officials bluntly label a bubble.

Because negative interest rates are uncharted monetary territory, there is still little data about how exactly effective they will be long-term. What Citi does note is the fact that weight loss central banks deploy them, global monetary becomes a “zero-sum” game.

“The more conventional and customary negative policy rates become and, given how pervasive low inflation and weak demand are across countries, the much more likely it’s that a negative rate in one country is going to be accompanied by cuts elsewhere,” write Rahbari and his team in their report.

For Canada, Citi notes there are still policy options in position prior to the central bank has to resort to negative rates. The us government is set to unveil billions in new stimulus spending to prop up the economy. Too, the financial institution could reintroduce forward guidance, first utilized by former governor Mark Carney in 2009.

Citi notes that until very recently, it had been inconceivable that central banks such as the Bank of Canada would even consider negative rates of interest. But a continual undershoot of inflation targets, stubbornly weak development in gross domestic products and a lack of alternate policy options leaves central banks around the world with few alternatives.

“Should these not suffice, the BoC will probably consider some mixture of asset purchases and negative policy rates in due course,” write Rahbari and his team within their note.