Canada’s Central Bank mulls possible negative interest regime

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Canada could theoretically follow the lead of other countries that have recently gone to negative interest rates in order to stimulate the economy, central bank governor Stephen Poloz told a business audience today.

The net effect of this action is that banks will have to charge depositors with fees to hold their money. It also means Canada’s economic prospects are bleaker than anticipated.

Speaking to the Empire Club in Toronto, Poloz said moving its benchmark interest rates below zero is something in the Bank of Canada’s monetary policy toolkit that the bank may consider down the line.

“The bank is now confident that Canadian financial markets could also function in a negative interest rate environment,” Poloz said in prepared remarks that had been set to be delivered around 1 p.m. ET.

While Poloz said the bank has changed its view on negative interest rates since the bank previously ruled that out as a policy option in 2009, “today’s remarks should in no way be taken as a sign that we are planning to embark on these policies,” Poloz said.

“We don’t need unconventional policies now, and we don’t expect to use them. However, it’s prudent to be prepared for every eventuality.”

The Bank of Canada twice this year cut its benchmark interest rate in an attempt to stimulate the economy.

But other countries have gone even further, slashing their rates below zero — literally charging savers a fee for saving their money — in an attempt to encourage spending and investment.

Switzerland, the European Central Bank and other European nations have all dipped their benchmark rate below zero for various reasons. Switzerland’s central bank rate is now minus 0.75 per cent.

“Why would anyone ever accept a negative nominal return when they could always simply hold cash and earn a zero return?” Poloz asked, rhetorically. “A big part of the answer is that there are costs to holding currency, particularly in large quantities, and these costs affect the lower bound. Because of the costs, which include storage, insurance and security, central banks can charge negative rates on commercial bank deposits without seeing a surge in demand for bank notes.

“We now believe that the effective lower bound for Canada’s policy rate is around minus 0.5 per cent, but it could be a little higher or lower,” Poloz said.

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