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Negative Interest Rates Coming To Canada, Growing Number Of Experts Says

That's not the mainstream view, at least not yet.

  • Bank of Canada says it's an option in case of "shock" to economy
  • $7 trillion of government-issued debt now has below-zero returns
  • Negative interest increasingly blamed for market panic

Interest rates in Canada today are among the lowest this country has ever seen, but a growing number of experts say they’re going to come down even further — all the way to below zero.

Canada is most likely to be the next country to chop its key lending rate below zero, says Marc Chandler, head of foreign exchange strategy at financial services firm BBH.

"I am not saying the Bank of Canada will, but that is the most likely candidate of those that are not there yet,” Chandler told CNBC on Friday.

A new report from Citigroup doesn’t think Canada will be the next country to pull the trigger on negative rates (it nominates Israel instead), but says Canada is among a small group of countries that could go below zero in the next two years.

“In the Czech Republic, Norway and perhaps Canada, a negative policy rate is not part of our central scenario, but the risk of a negative policy rate is material,” Citigroup economists wrote, as quoted at the Financial Post.

Central banks go negative when inflation is very weak or nonexistent, meaning the economy is stagnating. When a central bank sets its interest rate below zero, it means it’s charging commercial banks to keep their cash there. In theory, this should convince banks to lend more, instead of holding cash, helping to spur the economy.

The Bank of Canada suggested last December that negative rates are one of the tools in its toolbox “in the unlikely event that the economy was hit with another major negative shock."

There has been a wave of central bank rate cuts into negative territory recently, with the Bank of Japan’s surprise cut last month being perhaps the most jarring to markets. Sweden’s central Riksbank doubled down on negative rates this week, cutting its rate to -0.5 per cent from -0.35 per cent.

In all, five central banks — in Denmark, Japan, Sweden, Switzerland, and the Eurozone — now have at least one key rate below zero.

Panicking The Markets?

The predictions for Canada come even as many observers begin to worry that negative interest rates may be helping to fuel the panic seen in the markets in recent months.

An analysis at Bloomberg Business finds that one-quarter of the world’s government-issued debt, worth some US$7 trillion, is offering below-zero returns.

Some analysts are beginning to fear that with so much of this sort monetary stimulus going on, it’s basically not working anymore. Many fear negative rates are killing banks’ profit margins, threatening the world with another banking crisis.

They point to the example of Japan, which brought in negative interest rates in January. The market response? Stock prices have largely been falling ever since. Japanese bank stocks are down 28 per cent since the announcement, Bloomberg reports.

Not The Mainstream View

The idea that Canada’s interest rates will go negative is not yet the mainstream view. Most forecasts, at least for now, call for the Bank of Canada to stay pat, or to start raising rates by the second half of 2017.

Capital Economics said last week that the Canadian dollar’s decline, combined with the expected economic stimulus spending from the Liberal government, will prop up inflation and keep the bank from cutting rates below zero.

“We don’t foresee the Bank of Canada introducing negative interest rates anytime soon,” economist David Madani wrote.

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