Money Monday: What are negative interest rates and could they affect me?

Negative interest rates may ominous for the Canadian economy, but some experts say the move wouldn't signal fiscal doom – and everyday Canadians might barely notice the difference.

See Full Article

Last week, the Bank of Canada said it would consider the unprecedented move of lowering its interest rates into sub-zero territory in case of an economic crisis.

The move would primarily influence Canadian banks that deposit money to the central bank and make interest off these transactions. Currently, the interest rate sits at 0.5 per cent, which is already considered quite low. Before 2008, interest rates hovered around 4 per cent.

If the BOC dropped its interest rates below zero, it would effectively reverse this transaction; rather than Canadian banks being rewarded for their BOC deposits, they'd be charged for them.

What would this look like? Well, if a Canadian bank – say, the CIBC -- put $2 million into the central bank at a rate of negative 0.5 per cent – the lowest the BOC says it would be willing to go – the CIBC would be dinged for $10,000. For a $1 billion deposit, they'd lose $5 million.

The logic behind the move is that banks would be encouraged to keep their money liquid by loaning it out and investing in the Canadian economy. Economists theorize that would spur economic activity when things begin to look grim.

Of course, BOC governor Stephen Poloz's was commenting on a hypothetical scenario, and insisted that the central bank isn't actively planning a negative interest rate.

And while the move would be unprecedented for Canada, European countries such as Sweden, Denmark and Switzerland have all dropped their interest rates below zero.

Negative interest rates would undoubtedly mean big changes on Bay Street, but how would they influence the average Canadian? CTVNews.ca took a closer look at negative interest rates to break down the possible changes.

SHOULD CANADIANS BE WORRIED?

Implementing sych experimental economics may sound scary, but CTV's chief financial commentator Pattie Lovett-Reid says there are several reasons the announcement isn't cause for alarm.

"I don't think the average Canadian needs to worry about this," Lovett-Reid said. "But I understand why they are. It's uncomfortable."

There's no way to predict if or when rates could go negative, but Lovett-Reid says it's "extremely unlikely" the BOC would make the move. And if interest rates were to move south, the news wouldn't come out of left field.

"The bank has other options that they would certainly deploy before they would look to do this," she said.

WOULD THIS MEAN HIGHER BANK FEES?

Negative interest rates likely wouldn't mean added banking fees for everyday Canadians.

Banks understand that such a move would likely scare away customers (and their savings accounts) to competitors, Lovett-Reid says.

"The first thing people would do is take their money and put it under their mattress. Why would you leave it at the bank if you're losing money? I don't think we're anywhere near that. I don't think that's their initial course of action."

She adds that banks in countries with negative interest rates, such as Sweden, haven't hiked up their service charges.

However, Lovett-Reid adds that there's a chance that "larger commercial accounts" could be hit by an added cost of banking.

WOULD GETTING LOANS BE EASIER?

So if the central bank is hoping to encourage banks to help stimulate the economy, does that mean it'll be easier to get a loan?

Probably not, according to Lovett-Reid.

"I wouldn't say it'll be necessarily easier, because the banks will want to ensure that you qualify and you're a good lender. Banks will still have their criteria in place to make sure they're qualified borrowers."

Instead, she says banks will likely still exercise proper caution in the event of an economic doomsday.

"You can't lend everything you have because in the event the economy turns… we want to make sure we still have the strength of our financial institutions in place."

WOULD THIS AFFECT POTENTIAL HOMEBUYERS?

For Canadians looking to buy a home, negative interest rates likely wouldn't have much effect on the purchase.

Mortgage rates are tied to the bond market, Lovett-Reid says, and long-term estimations project bonds to go higher.

"This is simply a transaction between your financial institution and their financial institution, which is the Bank of Canada. So I don't think it will have an impact on someone trying to get a mortgage," Lovett-Reid said.

In fact, she says that encouraging Canadians to purchase new homes would benefit an economy with sub-zero interest rates.

"You're going to want people to continue to buy homes, because when people buy homes, goods are consumed," she said.

HOW ABOUT THE LOONIE?

If anything would suffer from negative interest rates, it's the Canadian dollar.

Lovett-Reid says money is "mobile, sensitive and scared," and that any weakness at the BOC could translate into fewer investors trusting Canadian banks with their cash.

"It would be additional pressure on the Canadian dollar," she said. "People go where they get the biggest bang for their buck is … so people looking to make money on their money would go into the U.S. dollar.

THE FUTURE LOOKS BRIGHT

Alas, all this speculation is likely for naught, Lovett-Reid says, as the Canadian economy anticipates growth.

It's taken longer for the economy to "pass the baton" from the energy sector to manufacturing, but Canadian economists expect good news in the coming months, Lovett-Reid says.

"They are seeing some traction. They expect growth to pick up in 2016 and 2017," she said.

According to Craig Alexander, vice president of economic analysis for a policy research institute C.D. Howe, Poloz was simply revealing emergency "ammunition" in the BOC's arsenal of tools.

"It isn't that they expect it to weaken, it isn't that they're planning on providing a lot more stimulus, but he basically wanted to lay out the fact that they do have options at their disposal," he told CTV's Power Play last week.

Alexander pointed out that negative interest rates have been utilized in Europe and that the United States, which has a relatively strong economy, has dabbled with quantitative easing, a similarly experimental fiscal move.

"The fact is, the world doesn't end," he said.



Advertisements

Latest Economic News

  • CRTC tells dissatisfied TV customers to 'demand better' and shop around

    Economic CBC News
    The CRTC wants Canadians to know that they "have choices" when it comes to their TV services. And if they don't like their current TV plan, they should "demand better" and shop around. To assist consumers, the Canadian Radio-television and Telecommunications Commission has posted a series of shopping tips on its website. Source
  • Car recalls and real estate secrets: CBC's Marketplace consumer cheat sheet

    Economic CBC News
    Recalled cars on road Are you about to buy a lemon? Millions of vehicles on Canadian roads have an outstanding safety recall, about one in six. Even worse, there's nothing stopping dealerships from selling a car with an open recall that hasn't been fixed. Source
  • OPEC persuades 11 non-members to cut production in attempt to drain oil glut

    Economic CBC News
    OPEC has persuaded 11 non-members to cut oil production, a move aimed at draining a worldwide oil glut and boosting low prices that have squeezed government finances in Russia and Saudi Arabia. Officials said Saturday that non-members agreed to cut 558,000 barrels per day for six months starting Jan. Source
  • Howard Buffett stepping down from Coca-Cola board

    Economic CTV News
    OMAHA, Neb. -- Howard Buffett is planning to step down from the Coca-Cola Co.'s board, so he can spend more time running his foundation that focuses on improving agriculture in the developing world. Howard Buffett, who is billionaire investor Warren Buffett's oldest son, has served on Coke's board since 2010. Source
  • Socks and bonds: Edmonton pals conquer wacky dress sock market

    Economic CTV News
    Two childhood best friends from Edmonton are cashing in on the funky dress sock craze that seems to be sweeping the often bland world of professional menswear. Popular outlandish designs with names like aqua moustaches, surfing sloth, and mint flamingo party have seen Good Luck Sock grow its sales nearly four-fold and double the number of retailers that carry the company’s far-out footwear over the past year. Source
  • Trump's 'Buy American' policy could have major implications for Canada

    Economic CTV News
    WASHINGTON -- Donald Trump has made it clear he wants Buy American rules in the massive infrastructure program he's planning, launching an ardent defence of domestic-purchase requirements that can cause tensions with other countries. Critics of such Buy American provisions say they not only freeze out foreign competition, but hurt Americans too, by driving up the cost of construction, which means taxpayers get fewer roads and bridges for their buck and fewer construction jobs in the long…
  • Ontario steelmaker Stelco seeks court OK for moving ahead with restructuring

    Economic CTV News
    TORONTO -- Southern Ontario steelmaker Stelco is seeking court approval to move forward with its restructuring following an agreement with Bedrock Industries. Ontario Finance Minister Charles Sousa said in a statement Friday that Bedrock's proposal would mean that operations at the Hamilton and Lake Erie facilities would continue and 2,100 jobs would be preserved. Source
  • Cuba, Google strike deal to hike internet speed: sources

    Economic CTV News
    HAVANA -- Google and the Cuban government have struck a deal giving Cubans faster access to the internet giant's content, two people familiar with the agreement said Friday. Eric Schmidt, chairman of Google's parent company, will formally sign the deal Monday morning in Havana, the two people said. Source
  • Ford CEO says Trump threats won't change small car plans

    Economic CTV News
    DETROIT -- Ford Motor Co. is going ahead with plans to move small-car production from the U.S. to Mexico despite President-elect Donald Trump's recent threats to impose tariffs on companies that move work abroad. CEO Mark Fields said Ford's plan to move production of the Ford Focus from Michigan to Mexico will proceed, in part because U.S. Source
  • Major New York markets hit second consecutive day of record highs

    Economic CBC News
    Major New York stock indexes hit a second consecutive day of record highs while the Toronto stock market continued its six-day rise, continuing a post-U.S. election rally. On Wall Street, the Dow Jones industrial average recorded its third consecutive record-breaking day, advancing 142.04 points to 19,756.85. Source