December 9, 2015 4:41 pm
Updated: December 9, 2015 4:54 pm

What Canadians need to know about negative interest rates

Bank of Canada governor Stephen Poloz raised the prospect of negative interest rates on Tuesday. Eric Sorensen looks at what that could mean.

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First, let’s get this out of the way. Negative interest rates are weird and highly experimental, according to experts, with only a few countries having ventured down the road of negative rates and almost all only recently.

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Canada may join them in the event of another global financial crisis, Stephen Poloz, the head of the country’s central bank, somewhat surprisingly revealed on Tuesday, so it’s important to understand what they are and why they would be used.

Global News sought out Carleton University economics professor and monetary policy expert Nicholas Rowe to establish a workable understanding of what exactly negative rates are.

Big encouragement

How do negative rates work, Prof. Rowe? “I would lend you $100 and in return you promise to pay me $99 later. That would be an example of a -1.0 per cent interest rate.”

Deposits held in banks could actually be charged interest instead of being awarded it, too, if some European examples were to come to fruition here (though banks have been reluctant to do so for fear of losing customers).

And how does this stimulate an economy? “Well, that is a big encouragement to go out and spend your money,” Rowe says.

‘The last thing you would want to do is save’

“The lower rates go, the more likely you are to spend and invest. There’s no reason that shouldn’t continue if rates went below zero. The last thing you would want to do is save.”

Negative rates would also help devalue the loonie even more, experts say, providing a shot in the arm to exporters and manufacturers by making Canadian goods more cost-competitive in the global market.

And mortgages?

But what could happen to say, mortgage rates if the Bank of Canada overnight rate went negative? “They would go down.”

In fact, in countries like Denmark where rates have been pushed below zero, some banks are paying mortgage holders a small amount of monthly interest on their home loans, helping homeowners work down their loans.

Prof. Rowe doesn’t see that happening in Canada.

“I think our banks would just sit on currency; find a nice big hole in the ground and fill it full of $20 notes and stick an armed guard over it. It would probably be cheaper.”

“You’d still have a mortgage market, but for zero percent mortgages,” Rowe suggested.

Is this topsy-turvy world of negative rates a possible reality for Canadians in the not-so-distant future?

“I don’t see it being very likely in the near- to medium-term future. There are other things we can do.”

The central bank has other tools, Rowe suggested, and more importantly, the new federal government seems willing and able to apply more targeted fiscal stimulus over the next several years that will likely provide the economic jolt the country needs.

“It’s nice to know [the Bank of Canada] has that in its back pocket, but I don’t think they’ll need it,” Rowe said.

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