In theory, savers would start to store their money themselves in cash/assets, making banks lose profit and hurting the finance sector. People would start to find borrowing and spending more attractive which would stir up the economy. In reality though, chartered banks are unlikely to make rates negative if they know there will be no profits.
Investor confidence in the market would shake up resulting in stock prices decreasing due to a fall in demand. Bloomberg reported that after Japan fell into negative rates its bank stocks had fallen by 28%. Moreover, in the bond market, government T-bonds would be trading at sub-zero rates. The reason investors would choose to hold such assets with negative yields, due to speculation of selling the assets to make gains. Along with increasing asset prices, low rates would also weaken the currency and increasing exports in the country.
There are many policies the BOC and government can still use to drive up the economy. Negative rates may tend to slow the economy rather than boosting it which is why many banks do not implement this policy often. Currently, with government spending aimed to spur the economy, Canada’s rates will not fall below zero. Interest rates will not be negative anytime soon but when and if they do fall, the economic conditions may truly take a test.
Sources:
http://business.financialpost.com/news/economy/canada-could-adopt-negative-interest-rates-within-the-next-two-years-citi-says
http://business.financialpost.com/investing/global-investor/negative-interest-rates-in-canada-could-be-destabilizing-to-investor-confidence
http://www.huffingtonpost.ca/2016/02/12/negative-interest-rates-canada_n_9219892.html
http://www.thestar.com/business/2015/12/08/bank-of-canada-would-consider-setting-interest-rate-below-zero.html
http://www.thestar.com/business/2015/12/08/bank-of-canada-would-consider-setting-interest-rate-below-zero.html
Author: Navnit Singh
Academic Director, UW Economics Society
Date: February 23, 2016
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