Since the financial meltdown of 2008, the US Federal Reserve Bank has kept it's Fed Funds rate (the rate banks borrow required reserve deposits at the Fed from each other) target at a quarter-percent or lower. Since the target generally moves in quarter-percent increments, that's as low as it can go without hitting zero...
Canada could theoretically follow the lead of other countries that have recently gone to negative interest rates in order to stimulate the economy, central bank governor Stephen Poloz told a business audience today after yet another drop in the loonie.
Speaking to the Empire Club in Toronto, Poloz said moving its benchmark interest rates below zero is something in the Bank of Canada's monetary policy toolkit that the bank may consider down the line.
That's a departure from 2009, when the bank said its theoretical lowest-possible interest rate was 0.25 per cent because to go lower would have been incompatible with certain financial markets, such as money-market funds.
I had missed the fact that the European Central Bank, the Eurozone's Fed, had its analogue to the Fed Funds rate at -0.2% a year ago. Three non-Eurozone countries, Switzerland, Denmark and Sweden, followed suit at the time, with the Swiss and Swedes still below zero as we go to press.
That would mean that banks would be charged for having excess reserves at the central bank.
The idea is to get banks lending more aggressively, which is designed to spur the economy. Canada has been in a mild recession as of late, as their oil exports have declined (at least in dollar value; they are probably pumping a similar amount of barrels) and reduced their GDP, so one could see why turning the knob below zero would be tempting to the Bank of Canada (their central bank).
As the CBC piece notes, negative interest rate will screw up other short-term interest rates (the "money market" is the term for short-term loans of various sorts), since other interest rates are often pegged to the central bank's rate. Financial software might fry a gasket when a negative interest rate is fed to it, as it might well be coded to assume a positive figure.
The Fed's monkeying with long-term rates ("Quantitative Easing") in the last few years seemed a radical departure from normal monetary policy, which sticks to short-term rates; negative benchmark rates is another mind-blower.