Canada might be among a number of countries to adopt negative interest rates in the next 2 yrs as the European policy experiment gains popularity, says a brand new report from Citigroup.
The Bank of Japan earlier this year had become the fifth central bank to go negative, which means it charges banking institutions to deposit money with it. The idea behind negative rates is they make it expensive to hold cash, forcing businesses, consumers and banks to start spending.
Citi economists, led by Ebrahim Rahbari, say within the report that Israel is likely to be the next bank to join the negative rate club this year, but Canada, along with a few others, may also introduce this type of policy in the next 2 yrs.
“In the Czech Republic, Norway and perhaps Canada, an adverse policy rates are not a part of our central scenario, however the chance of an adverse policy rates are material,” write Rahbari and the team in their report.
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In the months after the financial crisis, many central banks in the planet introduced zero rate of interest policies, or ZIRP, in an effort to get consumers spending and investing by making borrowing cheap. Not doing this risked accelerating the crisis, as consumers would hoard cash, deflation would set in and aggregate demand would collapse, worsening a recession right into a depression.
While zero rates helped return growth to the planet, some economies have not had stellar results. Deflationary pressures still dog many European economies and growth remains anemic. Disappointing growth led the European Central Bank to adopt negative rates in 2014.
In a means, a negative rate of interest is definitely an act of desperation. It punishes savers and rewards high risk by making borrowing cheap – theoretically, banks could charge cash on savings deposits and even return money 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 on the worth of the Swedish krona immensely.
Unfortunately, as the central bank cut rates further, its policymakers have also pressured the Swedish government introducing new regulations for cooling Sweden’s ultra-hot housing industry, which Riksbank officials bluntly label a bubble.
Because negative interest rates are uncharted monetary territory, there is still little data about how exactly effective they will be long-term. What Citi does note is the fact that as more central banks deploy them, global monetary becomes a “zero-sum” game.
“The greater 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 is going to be accompanied by cuts elsewhere,” write Rahbari and his team within their report.
For Canada, Citi notes there are still policy options in position prior to the central bank has to resort to negative rates. The us government is set to unveil billions in new stimulus spending to support the economy. Too, the bank could reintroduce forward guidance, first employed by former governor Mark Carney in 2009.
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 continual undershoot of inflation targets, stubbornly weak growth in gross domestic products along with 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.