Canada is flirting with a bizarro world of negative interest rates

When the European Central Bank meets in March, markets anticipate that it will cut its already negative deposit rate further, deepening Europe’s multi-year test out sub-zero rates of interest, which began in June 2014.

‘Ocean of fear’: Canadian investors located on record cash pile risk billions in lost returns

A new report suggests fearful investors are sitting on an archive $75-billion excessively money in their portfolios, the largest hoard in Canadian history

Read more

The ECB currently charges banks to park cash with it as being a part of a policy where the official deposit rates are set at -0.3 per cent. In a normal interest rate environment, it might be paying banks that leave their cash in its vaults. Three other countries – Denmark Sweden and Switzerland – now flirt with deposit rates as little as -0.5 per cent.

The experiment in Europe is being closely watched around the world, including by policymakers within Canada. Bank of Canada Governor Stephen Poloz discussed negative rates in a luncheon in Toronto last month, using it the radar here. While he asserted addressing negative rates wasn’t any indication the financial institution planned for their services, it nevertheless shows that Poloz and the team are weighing all options because the economy struggles to develop.

Negative minute rates are certainly an anomaly in economic policy. To date, enacting the insurance policy within the eurozone hasn’t led to the type of bizarro scenarios that negative rates can envision – receiving payment to have a mortgage, being charged to leave your money with banks.

Even in the event that the Bank of Canada ever adopts this type of policy – which seems not as likely following this month’s optimism from Poloz – it is unlikely that consumers would see much of a vary from the current rate of interest regime, say experts.

Related

Foreign investors are cashing from Canada’s provinces just when we need them the mostWhy economists are beginning to use the ‘R’ word again

“The Bank of Canada can do a lot using the aggregate number, and it’s as much as banks how they pass that on to consumers,” said Moshe A. Milevsky a professor at the Schulich School of Business at York University. “But consumers will never put their money right into a banking account that charges them a negative interest rate.”



 The entire reason for negative rates is to make it expensive to take a seat on cash. Theoretically, which will force any cash holders throughout the economy to place their cash to use, be it business deploying capital on new machinery or breaking new ground on projects or investors putting their money in to the stock exchange. The hope is that the incentive to invest will grow the economy. For countries struggling with problems for example deflation – the eurozone is a prime example – it’s hoped that all the renewed spending will bring inflation nearer to the 2 per cent mark favoured by central banks.

Some countries have experienced success with negative rates propping in the economy in different ways. Denmark, for example, could succeed of the ECB by lowering its rates even more, preventing an appreciation in the Danish krone. Which has helped keep exports healthy and it has registered respectable development in the economy.

But zero rates have created problems, too. In Sweden, the nation’s financial regulatory agency has warned that the cost-free borrowing of negative rates has established a housing and stock market bubble that’ll be difficult to deflate. 

Ultimately, negative rates here would simply cost consumers more than anything, Milevsky says. Because banks would be forced to spend the money for Bank of Canada, they would pass on those costs towards the consumer using a tactic common amongst Canadian banks – user fees.

“What you might see happening is a negative rate of interest masquerading as higher fees,” Milevsky said. “No bank within their right mind would tell a consumer, provide us with your $ 100 and we’ll give you 95. Which will never happen.”

So while some might imagine a negative rate of interest environment in which the bank pays you to definitely possess a mortgage, even in an extraordinary rate environment, that’s very unlikely to occur.