In a normal banking scenario, we deposit money in banks not only to safeguard it but to generate interest from it as well. On the contrary, a negative 0.5% interest rate means that when you deposit $100 at the beginning of the year for instance, you cash reduces by $0.5 at the end of the year. So, what will be the effect of this negative news to Canadians in general?
First, negative interest rates are less likely to affect anyone in the country as most banks tend to assume the losses that come along. There are many reasons however why central bank’s CEO, Stephen Poloz might have thought of taking that direction. For one, it discourages banks from hoarding cash. Continue reading as we look in depth at the effects of this move on mortgages rates and other sectors of the economy in general.
The below zero interest rates suggested by the central bank are much more likely to affect how banks run things rather than affecting the individual savers. If they were to affect individual people, most people would probably stash their cash under mattresses or in holes dug underground. Wouldn’t you do the same? But now, banks are the ones that take the heat of negative interest rates from the government. To start with, they are forced to pay the central bank for storing their money for them. And since no bank wants this to happen to them, they on the other hand start to give out loans and mortgage loans to their clients.
The mortgage loans here can either be high or low, but in most cases, the latter occurs. This is because while the bank might assume the charges that come with negative interest rates from the government, they tend to give much more lucrative loans just to make you pick them. Besides, the charges they are paying to the central banks now force them to create avenues to release their money into the public. In a way, expert also notes that negative interest rates would tend to encourage more people to spend instead of save. In any case, banks would by now be knocking at their customers’ doors to offer them loans. However, this is not always the case with all banks. Most of the banks anyway still use their strict measures when offering loans.
On the issue of mortgages, most people wouldn’t be affected by negative rates in any way. Mortgages are usually signed on a long term contract basis, and again it is usually a contract between you and your bank. Other than that, the government’s move to introduce negative zero interest rates would only be driven by the desire to push the economy up, hence they wouldn’t try something with potentially different results.
Finally, the news delivered by Stephen Poloz was basically nothing but a hypothesis of what would happen in a worst case scenario in the country. But at the present, Canada’s economy is doing just fine.