Negative interest rates in Canada could be ‘destabilizing to investor confidence’

More economists are weighing in on negative interest rates in Canada following the Bank of Japan had become the latest central bank to adopt the experimental monetary policy a week ago.

The Bank of Canada has said that it doesn’t have plans to adopt such rates here in the near-term, but has discussed the insurance policy oral appliance has studied the effects negative rates have had in Europe, where these were first deployed.

Japan surprised markets when it considered negative rates Friday, although the move was foreshadowed by Bank of Japan head Haruhiko Kuroda two weeks ago, when he said that gross domestic product in the country could be stuck at 0.5 percent or lower this year. That is a worrying sign for any country that just two years ago announced one of the largest quantitative easing programs (comparatively) on the planet.

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The Bank of Canada has so far stuck to merely discussing the impact of these extraordinary measures.

Derek Holt, vice president at Scotia Economics, notes that because there’s little data available concerning the long-term consequences of negative rates, it is difficult to gauge their full benefits to Canada. Prior to the European Central Bank’s adoption of negative rates in 2014, only Switzerland had briefly flirted with the negative band within the 1970s.

“Canada could be getting into uncharted waters on contracts not created for negative rates; both the uncertain and fully unknown effects might be destabilizing to investor confidence,” he said. “We can not possibly tell the full ramifications and unintended consequences versus giving a feeling of the myriad potential complications.”

The biggest worry about negative rates in Canada may be the impact on financial stability. Countries which have gone deeper into negative territory, such as Denmark and Sweden, have experienced their housing prices balloon because of essentially cost-free borrowing and devalued currencies making it cheaper for foreigners to purchase property.

Canada is already dealing with these two trends.

” In the context of already elevated house prices in Canada, further downward pressure upon borrowing costs could add to concerns of housing excesses because they have tended to do in Sweden and Denmark, ” he explained. Such concerns are nationwide.”

The second concern is related to the bond market, which becomes much more important as the federal government is looking to make use of a deficit to finance billions in stimulus spending within the coming years.

“While currency debasement could be a goal of negative rates, the price for any country that’s significantly dependent upon foreign appetite because of its borrowing needs can be reduced appetite for some kinds of bonds such fashion as to widen borrowing spreads,” said Holt.

But for now, Holt says Canada isn’t Japan or Europe. Unless the insurance policy experiment proves effective overseas in a manner that the financial institution of Canada guages could benefit Canada, negative rates are not in Canada’s future.

“Several differences on balance should lend themselves to dismissing negative rates as a necessary policy option,” he said.