Negative Interest Rates Could Be Adopted by Canada

Citigroup Report Said Canada Could Adopt a Negative Interest Rate Policy in the Next Two Years.

A negative interest rate, which is an uncharted monetary territory in Canada, means depositors are actually charged to keep their money in an account.

This makes it expensive to hold cash and hence consumers, businesses and banks are forced to start spending. This is a European policy experiment which is gaining rapid popularity.

A report from Citigroup said Canada could be among the few countries that could adopt this new negative interest rate policy in the next two years.

[pullquote align=”normal” cite=”- Citigroup report”]In the Czech Republic, Norway and perhaps Canada, a negative policy rate is not part of our central scenario, but the risk of a negative policy rate is material[/pullquote]

Israel would likely be the next bank to join the negative club this year, but Canada along with a few others could also introduce such a policy in the next two years, the report by Citigroup economists, led by Ebrahim Rahbari, said.

Earlier this year, The Bank of Japan became the fifth central bank to start using negative interest rates policy.

Citi sees a “material risk” that Canada will be one of the central banks to adopt negative rates in the next two years, it said.

“In the Czech Republic, Norway and perhaps Canada, a negative policy rate is not part of our central scenario, but the risk of a negative policy rate is material,” the report said.

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Many central banks across the developed world introduced zero interest rate policies or ZIRP, in the months after the financial crisis, to make borrowing cheap and thus get consumers to start spending and investing. This was done to prevent the financial crisis from accelerating as consumers would hoard cash leading to a collapse in demand which could worsen the recession into a depression.

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While zero rate policies helped return growth to the developed world, some economies did not show good results, many European economies still had disappointing growth. This led to the European Central Bank to adopt negative rates in 2014. A negative interest rate is actually an act of desperation, as it punishes savers and rewards risk takers by making borrowing cheap. Banks could charge money on savings deposits.

Interest rates in Europe, which are already in the negative territory, could further go down. Sweden’s Riksbank lowered its repo rate from -0.35 percent to -0.5 percent. These rates have made borrowing essentially cost-free but have driven down the value of the Swedish krona.

Citigroup notes that as more central banks deploy negative interest rates, global monetary becomes a “zero-sum” game.

“The more conventional and common negative policy rates become and, given how pervasive low inflation and weak demand are across countries, the more likely it is that a negative rate in one country will be followed by cuts elsewhere,” the Citigroup report stated.