More economists are hitting the scales on negative interest rates in Canada after the Bank of Japan became the latest central bank to consider the experimental monetary policy last week.
The Bank of Canada has said it has no plans to adopt such rates here in the near-term, but has discussed the policy tool and has studied the results negative rates have experienced in Europe, where these were first deployed.
Japan surprised markets when it turned to negative rates Friday, though the move was foreshadowed by Bank of Japan head Haruhiko Kuroda two weeks ago, as he asserted gdp in the country could be stuck at 0.5 per cent or lower this season. That’s a worrying sign for a country that just two years ago announced one of the largest quantitative easing programs (comparatively) in the world.
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The Bank of Canada has so far stuck to merely discussing the impact of such extraordinary measures.
Derek Holt, vice president at Scotia Economics, notes that because there’s little data available concerning the long-term consequences of negative rates, it is difficult to gauge their full benefits to Canada. Prior to the European Central Bank’s adoption of negative rates in 2014, only Switzerland had briefly flirted using the negative band in the 1970s.
“Canada would be entering into uncharted waters on contracts not designed for negative rates; both uncertain and fully unknown effects could be destabilizing to investor confidence,” he explained. “We can not possibly tell the full ramifications and unintended consequences versus giving a feeling of the myriad potential complications.”
The biggest concern about negative rates in Canada is the impact on financial stability. Countries that have gone deeper into negative territory, such as 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 buy property.
Canada is already dealing with these two 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 do in Sweden and Denmark, ” he said. Such concerns are nationwide.”
The second concern is related to the bond market, which becomes much more essential as the us government is looking to use a deficit to invest in billions in stimulus spending in the coming years.
“While currency debasement could be a goal of negative rates, the price for any country that’s significantly dependent upon foreign appetite for its borrowing needs could be reduced appetite for some kinds of bonds in such fashion as to widen borrowing spreads,” said Holt.
But for the time being, Holt says Canada isn’t Japan or Europe. Unless the policy experiment proves effective overseas in a manner that the financial institution of Canada guages may benefit Canada, negative rates are not in Canada’s future.
“Several differences on balance should lend themselves to dismissing negative rates as a necessary policy option,” he explained.
