More economists are hitting the scales on negative rates of interest in Canada following the Bank of Japan had become the latest central bank to consider the experimental monetary policy last week.
The Bank of Canada has said that it has no intends to adopt such rates within the near-term, but has discussed the policy tool and has studied the results negative rates have had in Europe, where these were first deployed.
Japan surprised markets when it considered negative rates Friday, although the move was foreshadowed by Bank of Japan head Haruhiko Kuroda fourteen days ago, as he asserted gdp in the country could be stuck at 0.5 percent or lower this year. That’s a worrying sign for any country that just two years ago announced among the largest quantitative easing programs (comparatively) in the world.
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The Bank of Canada has to date stuck to merely discussing the impact of such extraordinary measures.
Derek Holt, v . p . at Scotia Economics, notes that because there’s little data available concerning the long-term consequences of negative rates, it’s difficult to gauge their full-benefits to Canada. Before the European Central Bank’s adoption of negative rates in 2014, only Switzerland had briefly flirted with the negative band within the 1970s.
“Canada would be getting into uncharted waters on contracts not created for negative rates; both uncertain and entirely unknown effects might be destabilizing to investor confidence,” he said. “We can’t possibly tell the full ramifications and unintended consequences versus giving a sense of the myriad potential complications.”
The biggest worry about negative rates in Canada may be the impact on financial stability. Countries which have gone deeper into negative territory, for example Denmark and Sweden, have experienced their housing prices balloon as the result of essentially cost-free borrowing and devalued currencies making it cheaper for foreigners to purchase property.
Canada is already coping with both these trends.
” Poor already elevated house prices in Canada, further downward pressure upon borrowing costs could increase concerns of housing excesses as they have tended to complete in Sweden and Denmark, ” he said. Such concerns are nationwide.”
The second problem is related to the text market, which becomes even more important as the federal government is looking to make use of a deficit to invest in billions in stimulus spending in the coming years.
“While currency debasement can be a goal of negative rates, the price for a country that is significantly dependent upon foreign appetite because of its borrowing needs can be reduced appetite for many types of bonds such fashion regarding widen borrowing spreads,” said Holt.
But for the time being, Holt says Canada is not Japan or Europe. Unless the policy experiment proves effective overseas in a manner that the Bank of Canada guages may benefit Canada, negative minute rates are not in Canada’s future.
“Several differences on balance should lend themselves to dismissing negative rates as a necessary policy option,” he said.
