What we need to know about negative interest rates.
The Bank of Canada raised the prospect of a negative interest rate last Tuesday. Let’s have a look at what that could mean. First let’s get one thing out of the way. A negative interest rate is 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.
Canada my join them in the event of another global financial crisis, so it’s important to understand what it is and why it would be used. Nicholas Rowe, a Carleton University economics professor and monetary policy expert shares his understanding with us.
How would a negative rate work? I would lend you $100 and in return you promise to pay me back $99. That would be an example of a -1.0% interest rate. Deposits held in banks could actually be charged interest instead of being awarded it. (Looking at European examples, banks have been reluctant to do so for fear of losing customers though)
How does this stimulate an economy? It is a big encouragement to go out and spend your money! The last thing you want to do is save. The lower rates go, the more likely you are to spend and invest. 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.
What would happen to mortgages 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, but I don’t see that happening in Canada.
Is this confusing 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.
Original article: http://globalnews.ca/news/2390842/what-canadians-need-to-know-about-negative-interest-rates/
