The discussions about negative interest rate policies have been floating around the world lately. With some countries around the world already adapting to this policy, it is questionable whether Canada will do the same. Experts are analyzing the effects of negative rates which Japan and Europe have implemented. Many have been predicting that interest rates in Canada will go negative if GDP continues to faintly grow and inflation is weak. The Bank of Canada however, announced that rates would not go below zero in the near future. However, if the economy faces an adverse shock and alternative policies are insufficient, the BOC may decide to go with this policy. In order to drive spending and investment in the economy, the bank would resort to this.
When interest rates are low already along with inflation rates being low, it makes it difficult for central banks to stir up the economic conditions. It is challenging to balance out inflation while keeping rates above zero in this situation.
The effects of a negative interest rate would have uncertain effects for the economy in the long run. However, by taking a glimpse at countries with negative interest rates in the past, we can conclude that it is possible for there to be a housing price bubble. The negative rates would allow people to borrow without costs, and demand for houses to increase. For example, a borrower with a $1 million loan would only have to pay back $900,000. Nonetheless, more foreign investment in property may result due to a devalued currency which would drive up housing prices as well. Nonetheless, negative rates would clearly be unfavourable to savers and lenders.
In the case of negative rates, commercial banks would have to pay the central bank to keep reserves there. Thus, instead of holding money at the central bank, commercial banks would have the incentive to lend out more, which would speed up the flow in the economy. Bank profits decrease when rates are negative which creates a sense of fear and threat of a banking crisis. If chartered banks decided on making their rates for customers negative, savers would have to pay to keep their cash in these banks.
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Should Canada Adopt Negative Interest Rates?