Effects of a Negative Interest Rate, and Why it’s Unlikely

interest and rates sign

Effects of a Negative Interest Rate, and Why it’s Unlikely

Back in December, Bank of Canada Governor Stephen Poloz revealed an option which could help the struggling Canadian economy: a negative interest rate.

Explained in detail in this CBC article, a negative interest rate essentially means that when putting our money in a savings account, for example, it would suddenly cost us money.

The European Central Bank, Sweden, Switzerland and a few other countries have recently experienced a negative interest rate. Canada, however, has never seen a rate below zero.

Even though he dropped the term, Poloz stressed that the bank of Canada does not currently intend on introducing a negative interest rate. “Today’s remarks should in no way be taken as a sign that we are planning to embark on these policies,” said Poloz. “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.”

Why it Likely Won’t Affect Canadians

Even if it happens, a negative interest rate won’t necessarily affect our personal finances. Banks are unlikely to charge their clients interest for holding onto their savings, fearing Canadians pull out all of their money to hide it under their mattresses.

Negative interest rates would also mean banks would pay us to take out loans, which is beyond far-fetched. Can you imagine being paid hundreds of dollars each month just for having a mortgage on your house? Sign me up!

In all seriousness, even if a negative interest rate was introduced by the Bank of Canada, it would not be passed onto Canadians directly. The goal of implementing a negative interest rate would be to encourage banks to stop holding onto cash. It could also encourage governments, businesses and individuals to spend more since keeping their cash won’t pay them any interest.

Although meant as a tool to stimulate the Canadian economy, the negative message it would convey makes it unlikely to happen anytime soon.

What is likely? The Canadian government is more apt to tackle issues of growing household debt, mortgage rules, and taking other measures to reduce the chances of a major Canadian recession.