In 2015, the Bank of Canada, the central bank responsible for our country’s overnight lending rate, cut interest rates twice – notching the overnight lending rate at 0.5%. The overnight lending rate is a key influence in Canada’s economy; the overnight lending rate influences everything from mortgage rates, savings rates and GICs. The Bank of Canada’s decisions certainly impact the way you save, spend and borrow.
Although Stephen Poloz, the governor of the Bank of Canada, has not made any declarations regarding negative interest rates, it was previously reported in December that he has mentioned negative rates as a possibility should the Bank of Canada feel it to be necessary.
And although negative interest rates might seem like an unlikely scenario; other countries’ central banks currently have negative interest rates in place today.Canada wouldn’t be the first country to go negative. Central banks in Hungary, Switzerland, Denmark and Japan have rates below zero and the results have not been detrimental – providing Stephen Poloz an additional tool in his belt should the need arise.
Negative interest rates mean that the Canadian banks will actually incur costs to keep their money with our central banks. And because it doesn’t particularly make sense to lose money by keeping money stored away, negative rates encourage banks to lend out the money to Canadians in order to stimulate economic consumption and activity. This might mean providing more business loans to entrepreneurs, more loans for potential home-buyers or more shopping at the malls.
Today, many Canadians incur fees in their savings or chequing accounts while earning next to no interest – this effectively costs you to put money away in your account. When the monthly fees of your banking accounts outweigh any interest paid due to you, you’re effectively in a negative interest rate scenario!
If Canada’s central bank were to decide to employ negative rates in our economy, you may soon see service fees and chequing account fees increase from Canada’s largest banks. On the other hand, mortgage rates and the rates of other loans, while they might never go negative, might go even lower from today’s historical lows.
You may recall from previous MonsterMortgage.ca blogs that the last time the Bank of Canada cut their rates, Canada’s banks only passed on a part of the savings. Moving into negative interest rate territory would likely mean the same thing as bank’s look to protect their profit margins. And while rates may be lower, it does not necessarily mean that banks’ standards for lending will drop; however, qualified borrowers would certainly be able to benefit.
Traditional value havens such as precious metals, valuable jewelry or art pieces may even become ways to store value. If those means fail, well it doesn’t hurt to have a mattress to store your money under – only kidding.
While no one can say exactly whether when or if negative interest rates might be introduced into the Canadian economy, the uncertainty of today’s global economy certainly has made negative rates a talking point – something which would have been unthinkable in years past.
Although negative interest rates have yet to cross the Atlantic ocean, Canadians would certainly be very interested to keep an eye out on how negative interest rates have impacted our neighbours around the world.
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