Interest rates, both on personal debt and in the context of the national economy, are one of the major decision drivers for what people do with their money. We’re obviously inclined to grow our money with investments that pay good interest, while avoiding high-interest debt – but did you know that interest rates can also dip into the negative?
Standard textbook theories hold that negative interest rates are infeasible because depositors always have the outside option of holding onto cash, which is storable and therefore pays an effective interest rate of zero.Â The move is also meant to discourage consumers from saving, while encouraging them to spend. It can be viewed as a sign of economic desperation -Â a bid to reinvigorate an economy with other options exhausted.
The Bank of Canada already cut interest rates twice this year to 0.5 per cent, in a bid to stimulate the economy. Canada has never operated in a sub-zero interest rate environment, but as financial consumers hold on to cash in greater amounts, declining interest rates could have a significant effect on the everyday personal finance plan.
If negative interest rates do arrive in Canada, they might exacerbate concerns over the amount of debt held by Canadians, particularly mortgage debt. Diligent savers might be pushed toward riskier investments, potentially affecting the stability of their financial plans in the long term. An environment of increased risk and long-term accrual of debt is a dangerous one to find ourselves in, particularly when so many Canadians are in need of ways to rebuild their credit and get back on the path to financial independence, as well as to make investments that benefit them in the long term. Alternative financial institutions should, just as much as their larger counterparts, find ways to safeguard consumers against harmful debt and give them the financial tools to build their savings in the long term.