You
’ve probably heard about negative or sub-zero rates - it’s a trending topic, after all. In Europe, several countries already have sub-zero rates and Bank of Canada governor Stephen Poloz has said that he wouldn’t rule out taking our rates in that direction. But what does it really mean to you? Let’s find out.
Up until a few years ago the idea of rates falling below zero had zero traction. But the global economy hasn’t grown as quickly as expected after the recession and the central banks of many still-suffering countries, especially in Europe, have been forced to come up with new stimulus-inducing ideas.
Lowering interest rates to near or even below zero is one such idea. The thinking is: zero or sub-zero rates will encourage people and companies to borrow cheaply and spend more money, thus increasing economic growth. Here in Canada, to help the economy grow during the oil price plunge, the Bank of Canada cut the interest rate from 1% to 0.75% in January 2015 and then to 0.5% in July. As energy prices fell further, the Bank of Canada said it would continue cutting rates, perhaps into negative territory - but with oil prices rebounding and the Canadian dollar strengthening, that may not happen. In its most recent meeting in April, the Bank of Canada kept its benchmark lending rate at 0.5%.
There are two sides to sub-zero rates for consumers and investors. On the positive side, people are able to borrow money at extremely low rates. On the negative side, money in savings accounts won’t earn as much interest and conservative income-producing securities like money market funds and Guaranteed Investment Certificates (GICs), where rates are already low, may fall even more. However, lower rates are usually positive for stocks, so equity values could rise.
In a zero/sub-zero environment, gold could do well and high-yield bonds - debt issue by corporations - also begin to look more attractive.
No, zero/sub-zero rates have not yet come to Canada - and they may never do so - but it’s still a good idea to talk to your professional advisor about how lower rates could affect your portfolio and your overall financial plan.
