Canada might be among a handful of countries to consider negative interest rates in the next 2 yrs because the European policy experiment gains popularity, says a new report from Citigroup.
The Bank of Japan captured became the fifth central bank to go negative, which means it charges financial institutions to deposit money with it. The concept behind negative rates is they make it expensive for hold cash, forcing businesses, consumers and banks to start spending.
Citi economists, led by Ebrahim Rahbari, say within the are convinced that Israel will probably be the next bank to join the negative rate club this season, but Canada, plus a few others, could also introduce this type of policy within the next two years.
“In the Czech Republic, Norway and maybe Canada, a negative policy rate is not a part of our central scenario, but the chance of an adverse policy rate is material,” write Rahbari and the team within their report.
- ‘Flashing warning signs’: Canadian markets bracing for ‘dramatic’ Bank of Canada action – and a recessionWilliam Watson: How negative rates of interest could spur more fear than growthNegative rates of interest in Canada could be ‘destabilizing to investor confidence’
In the months after the financial crisis, many central banks within the developed world introduced zero rate of interest policies, or ZIRP, in an effort to get consumers spending and investing by looking into making borrowing cheap. Not doing this risked accelerating the crisis, as consumers would hoard cash, deflation would occur and aggregate demand would collapse, worsening a recession into a depression.
While zero rates helped return growth towards the developed world, some economies have not had stellar results. Deflationary pressures still dog many European economies and growth remains anemic. Disappointing growth led the ecu Central Bank to adopt negative rates in 2014.
In a means, an adverse rate of interest is an act of desperation. It punishes savers and rewards risk taking by looking into making borrowing cheap – theoretically, banks could charge cash on savings deposits and even return cash on loans.
In Europe, rates of interest already are going further into negative territory. Sweden’s Riksbank announced Thursday that it is lowering its repo rate from -0.35 percent to -0.5 percent. Negative rates have made borrowing for consumers essentially cost-free, while driving down the worth of the Swedish krona immensely.
Unfortunately, as the central bank cut rates further, its policymakers have also pressured the Swedish government to introduce new regulations for cooling Sweden’s ultra-hot housing industry, which Riksbank officials bluntly label a bubble.
Because negative rates of interest are uncharted monetary territory, there’s still little data about how effective they will be long-term. What Citi does note is the fact that weight loss central banks deploy them, global monetary becomes a “zero-sum” game.
“The more conventional and common negative policy rates become and, given how pervasive low inflation and weak demand are across countries, the much more likely it’s that a negative rate in one country will be accompanied by cuts elsewhere,” write Rahbari and his team in their report.
For Canada, Citi notes there are still policy options in position before the central bank has to turn to negative rates. The us government is set to unveil billions in new stimulus spending to support the economy. As well, the bank could reintroduce forward guidance, first employed by former governor Mark Carney in ’09.
Citi notes that until very recently, it had been inconceivable that central banks like the Bank of Canada would even consider negative interest rates. But a continuous undershoot of inflation targets, stubbornly weak development in gross domestic products and a insufficient alternate policy options leaves central banks around the world with few alternatives.
“Should these not suffice, the BoC is likely to consider some combination of asset purchases and negative policy rates in due course,” write Rahbari and the team within their note.