Do you think negative interest rates would ever be implemented in Canada?
My opinion (and realize that the error bars are huge with this response):
Not yet.
For instance, there would be a pretty good legal case to be made that Sections 18(l), (l.1) and (l.2) of the Bank of Canada Act would have to be amended since, for example, it only authorizes the Bank of Canada to pay interest on deposits, not charge banks for such deposits. Changing the legislation requires parliamentary approval, and such a decision would likely not obtain unanimous consent. This would mean there would be at least a week of debate on the matter, assuming a majority government forced time allocation on such legislation, coupled with senate approval. Let’s just say with the current political environment in Canada, co-operation in Parliament is not too likely at the moment.
I am not a lawyer. I could be wrong. However, I have not seen this particular clause in the Bank of Canada Act mentioned by any commentators on hypothetical negative interest rates in Canada – i.e. whether the Bank of Canada actually has the authority to doing this. It is assumed by all of the media and publications they can do so, but in my eyes such an assumption should not be granted.
This is not to say that the yield curve can’t go negative – indeed, the markets can push bond yields to negative rates, or push BAX futures above 100. This is completely allowed. The question is whether the Bank of Canada can set the overnight target rate to below 0%.
The Bank of Canada has examined the matter and written about it in a small amount of detail regarding the impact of international banks when they implemented negative rates (Framework for Conducting Monetary Policy at Low Interest Rates), a November 2015 paper on The International Experience with Negative Policy Rates).
If somebody out there has a legal background and would like to chime in on this matter, it would be appreciated.
IANL, but here is a quote from the Bank of Canada:
“Some have asked why rates can’t be lowered to zero or beyond, into negative territory—a policy that some other central banks have implemented. Negative rates happen when central banks lower their policy rates below zero and charge interest for holding bank deposits (it’s usually the other way around). We could still use negative rates if we thought it was necessary. But zero or negative rates come at a cost—they can impair the function of key funding markets. This is because investors would pull money out of short-term financial assets and hold other assets, such as cash, that don’t charge negative rates. This is particularly true if the banks pass these negative rates on to their depositors. That is the opposite of what we want to achieve at a time when the system is already under tremendous strain.”
…which seems to imply they could go that way but not right now.
I read that as well, the question is whether the Bank needs to ask Parliament for authorization to do so. Hence my question for any lawyers out there…
Heya Sacha, a followup from a contact at Bank of Canada for whatever it’s worth!
“If the Bank ever decided to implement negative rates, no changes to the legislation would be required, as the powers in section 18 of the Bank of Canada Act are discretionary. This means that although the Act gives the Bank authority to accept deposits from certain entities and pay interest on some of those deposits, it is not required to do either of those things.”
Thanks Larry. Why bother having Section 18 when all of the sub-clauses are “May” and thus the individual sub-clauses don’t need to be defined at all!