Central bank flirting with negative interest rates, analysts say

Expect Bank of Canada to ramp up discussion of unorthodox policy in near future: industry experts
Canadians will likely hear a lot more discussion about the possibility of negative interest rates in the near future, analysts say | Shutterstock

When Bank of England governor Mark Carney announced an interest-rate cut from 0.5% to 0.25% – a record low and the first cut since 2009 – the Canadian-born economist and former Bank of Canada (BoC) governor was forced to tackle some tough questions.

Carney was asked about whether or not the Bank of England, which also announced a stimulus package to help with the fallout of Brexit, would ever consider negative interest rates to spur the British economy.

A few European countries such as Sweden, Switzerland and Denmark are employing negative interest rates, as is Japan, which brought in the measure earlier this year. With negative interest rates, a central bank starts charging other banks to hold their money, with the aim of spurring those banks to push that money out into the economy through increased lending.

Peter Kinch, a mortgage and investment advisor based in Port Moody, said he can’t envision a future in which Canada employs negative interest rates to stimulate the economy, but added that Canadians should get ready to hear regular references to it.

“You’re going to hear the term negative interest rates a lot,” Kinch said. “It will almost be like name-dropping. Watch for the Bank of Canada and [current BoC governor] Stephen Poloz – I would not be surprised if he uses the term in the upcoming sixth months.”

Last December, Poloz gave a speech at the Empire Club of Canada in Toronto and broached the subject of negative interest rates as part of the “evolution of unconventional monetary policies”. He also noted he believes “the [BoC] is now confident that Canadian financial markets could also function in a negative interest rate environment.”

Kinch said the idea is to float the term to help soften the blow if the BoC is forced to further cut the overnight benchmark rate, which sits at 0.5%. In November 2000, the BoC introduced a system of eight fixed dates on which it announces whether or not it will change the key policy rate. The next scheduled date is September 7.

“There’s room for the Bank of Canada to start a lowering process long before we ever get to negative interest rates,” Kinch said. “So that’s the reason why I said watch for the language over the next sixth months. What it will do is lay the groundwork for them to drop interest rates another quarter point without any negative reaction from the consumer public.”

Paul Beaudry, professor at the University of British Columbia’s Vancouver School of Economics, said the possibility of negative interest rates in Canada is “exploratory” territory for central banks seeking to stimulate the economy, however most lenders may not respond the way the central banks hope.

“We don’t know at what point banks will just decide to take out the physical bills and then buy a big vault,” he explained. “And then they’re not getting the negative interest rate, but that is costly for them.”

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