Bank of Canada may impose negative interest rates

[Alan C.]

Bank of Canada willing to resort to below-zero interest rate in face of major economic crisis, Poloz says

 

The Bank of Canada would be willing to cut its benchmark interest rate to below zero per cent if the country is faced with a major economic shock, says Stephen Poloz, governor of the Bank of Canada.

In a speech to the Empire Club of Canada in Toronto, Poloz described the use of negative interest rates as one of four “unconventional monetary policy measures” it would be willing to deploy if faced with a major economic crisis. Yet he said the bank is unlikely to use such measures as it expects the Canadian economy to grow in 2016 and reach full capacity in mid-2017.

 

Also see:

 

Swedish central bank cuts key rate further below zero

 

European Central Bank imposes negative interest rates on banks

[VolT]

What is the implication of negative interest rates?

[J. D. Stembal]

What is the implication of negative interest rates?

 

Banks charge clients to deposit, and loans become a losing proposition for the lender. Debt becomes a profit instead of a liability.

[Alan C.]

It's intended to penalize savers. It imposes a fee for having a balance in the bank. My guess is that it will only apply to balances over a certain amount. It's supposed to force banks to make loans and to encourage people to spend. Politicians incorrectly believe that spending drives economic growth.

[labmath2]

I agree with you Alan that spending does not create economic growth, but that is because of the way you and I have defined economic growth (increase in effeciency of production). Economic growth now colloquially refers to employment. So when they say we will reach full capacity in 2017, they mean we will reach full employment.

[VolT]

Thank you.

[fractional slacker]

It usually starts out with those who have a 6 figure balance. Irregardless, it affects everyone.  Negative rates means the money is so rotten, not even bankers can stand the stench. Savers either have to fend for themselves or convert into non cash assets such as real estate, gold, land, bitcoin, stocks, etc.

This could also be an indicator The Fed is bluffing again and won't raise rates now, or possibly ever.

[hermitcrab]

What is the implication of negative interest rates?

Reduced liquidity, increased volatility (crashes).

 

People and institutions will have incentive to remove their money from banks.  Putting it into (bidding up) other assets, or just stuffing it in a safe.  Once everyone who has money has put it into assets, the fall will begin.

 

Reducing savings account balances removes the cushion (money able to come in and buy when asset prices fall) and increases the risk of total collapse of this highly leveraged system.

 

It like the central banks are playing the part of the Sorcerer's Apprentice.  Using magic which will become overpowering and uncontrollable.