financial news .

Negative Interest Rates

In December the Bank of Canada announced that it could cut interest rates below 0 if an economic crisis was facing the country. Central Banks in Sweden and Japan have already introduced negative interest rates.

What are Negative Interest Rates and How do They Work?

Currently the Bank of Canada pays interest on funds that they keep at the Bank of Canada. If rates are cut to below 0 the banks would be required to pay the centreal bank to hold their deposits.

For example, if a the rate was negative 1% then a bank would have to pay the central bank $10,000 if they deposited $1 million with the Bank of Canada.

Depending on the length of time negative interest rates are in effect the impact on the banks could be a drop in profit.

Banks could try to offset the cost of keeping money at the Bank of Canada by reducing the deposits they keep with the Bank of Canada, increasing charges on accounts and / or increasing user fees.

Negative Interest Rates and the Economy

Negative interest rates are designed to be an incentive for the banks to do something with their money. The increased deposit costs are designed to encourage the banks to lend or invest their money.

Consumers and Negative Interest Rates

The drop in interest rates would be a benefit to consumers who can afford to borrow money because the interest rate on the borrowed money would be low.

On the opposite side interest rates on savings accounts would be dropped resulting in lower returns for the consumer. Also, if the major banks want to keep their profitability up they may increase the fees and service charges associated with consumer accounts.

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