Should Canada take interest in adopting negative interest rates?

interest_ratesWhen you put your money in a bank, you expect some kind of return — after all, the bank is profiting from your trust. However, there’s a trend in Asia and Europe to charge “negative interest rates,” which is, amazingly, banks charging you an interest rate to essentially hold your funds.

While it hasn’t come to Canada (yet), the negative interest could likely be added on top of already steep service charges and other fees. Bloomberg explains that this strategy is an attempt to “reinvigorate an economy” following financial hardship (think Central Europe and the Greek debt crisis).

The thought is that if people aren’t making any money on investments, they’ll spend their money instead and boost the economy. This also means that those with money tied up in investments could stop seeing yields on their financial products, such as bonds. So the obvious question then is, why invest at all?

If these governments are implementing negative interest as a way to boost the economy, they could be setting themselves up for disaster. After all, as Bloomberg further points out, there’s nothing stopping you from stuffing your cash under a mattress. At least then, it will hold its worth (theoretically).

The banks are really the ones bearing the brunt of the negative interest borrowing from central banks, and it’s essentially up to each lender whether to pass along the losses to its customers. Even if the government here adopts this policy and the banks are unwilling to charge customers on deposits for fear of losing business, it may be tougher to get a loan from a bank due to the fear of fewer bank resources, which could slow markets such as real estate buying.

On the flip side, since the negative rates mean banks are actually being charged to hold cash, it could encourage them to give out more loans to people like you. If we look at past moves by governments in adopting negative rates, such as Denmark, it did not end up as a financial disaster. It also didn’t noticeably impact bank interest rates. However, the specific goal of each government adopting negative interest (in Denmark’s case, it was to keep its currency from growing too strong following an investor flood due to high risk in the Eurozone) could be different, meaning the outcome could be hard to predict.

According to Huffington Post Canada, this seemingly unorthodox practice could be coming to Canada in the coming years. The online news source says the Bank of Canada (our central bank that controls overnight lending rates to individual banks) could use this tactic as a way to “shock” the economy back to health.

However, many expert forecasts have our central bank holding steady on the lowest interest rates the country has ever seen, without actually going below zero. This delay in Canada’s move to negative interest can be attributed to an expected investment from the new Canadian government, as well as the weaker dollar, according to the Huffington Post.

So it really comes down to whether banks are willing to risk your business if the policy is adopted and they decide to pass along the interest crunch to you, the consumer. There’s nothing to stop you from pulling your cash from your accounts, which could (theoretically) cause banks to collapse and force the Bank of Canada to keep the system going. It could also spur limits on your withdrawals, which is one tactic used by Greece during its recent meltdown.

On the other hand, banks hoarding cash could be forced to lend to people who traditionally couldn’t get a loan, to prevent being charged on their assets. This could lead to more spending by consumers, but it could also mean a higher risk for banks to get their loans back — which could also end up in disaster.

Until the Canadian government makes such a move, it’ll be wise for us to watch how other countries that are implementing negative interest rates fare in the long-term. It may be a move of desperation that is shortsighted, but we won’t know for sure until the financial ripples reach our shorelines.