# BOC contemplating lowering the prime lending rate to BELOW ZERO?



## carverman (Nov 8, 2010)

Heard on the news recently that the Bank of Canada is considering lowering the prime rate half a percentage point below ZERO?



> The Bank of Canada has restocked its emergency kit to defend the Canadian economy against major shocks,* including indicating that it would consider pushing interest rates as much as a half percentage point into negative territory in the event of a crisis.*





> *The cost of borrowing will be close to 0 per cent*. “If you have a job and you are secure and you are doing great in this kind of crisis, you are laughing because you can borrow at zero,” said Benjamin Tal, deputy chief economist with CIBC.
> At the same time, banks may decide to pass on the extra costs to their customers and charge them to safeguard their cash.
> 
> So what is a depositor supposed to do? You can take your money out of the bank and invest it in an asset, such as a bond, or you can bring it home and store your cash in your mattress.


http://www.theglobeandmail.com/repo...t-rates-and-how-do-they-work/article27669897/


How can that be possible? Are we heading towards some economic disaster because of the sagging economy and oil prices?
If this crisis should happen, what would happen to the savings accounts of millions of Canadians that are already earning less than 1%? 

Would that mean, just park your money at 0% interest in any bank and face service charges for the bank to safeguard your savings, while it is eaten up even more by inflation, while the banks still use it to loan out your savings at the higher interest for loans etc?

http://www.theglobeandmail.com/repo...to-deal-with-economic-shocks/article27643760/


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## HaroldCrump (Jun 10, 2009)

Negative interest rates are already in force in many countries.
ECB has negative policy rates.
SNB has negative rates.
I believe Denmark and Sweden so as well.

Aside from that, bond market has had negative rates for 2 yr. and 5 yr. term bonds for at least 2 - 2.5 years now, such as on German bonds.


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## stantistic (Sep 19, 2015)

*Additional Discussion Negative Rates*

See Forum - Investing - Thread - Rate Reset Preferred Shares - Posts 17 and 18.


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## andrewf (Mar 1, 2010)

Just to be clear, the BoC is talking about negative overnight rates (what banks get for deposits with the BoC), not rates that consumers see. Consumers would still be seeing a bank prime rate of ~1.7% with an overnight rate of -0.5%.


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## lonewolf (Jun 12, 2012)

There is going to be another hang the greedy bankers in the streets. People might start to lose it when cash is out lawed with negative interest rates.


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## james4beach (Nov 15, 2012)

What disgusting news from the Bank of Canada. Trying to both pump up credit & housing, and at the same time trying to weaken the Canadian dollar.

I guess they are saying that the Canadian financial market is in a state of crisis. Zero and sub-zero rates are what you need when it's a total crisis with imminent collapse. Extremely bearish. Markets that need zero/negative interest rates are very sick markets.


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## andrewf (Mar 1, 2010)

^Disgusting?

I think you're the one that's spinning here, james.


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## OnlyMyOpinion (Sep 1, 2013)

Sad to read posts based on rank speculation and no facts. 
Here is the BOC's press release announcing a refresh of their monetary policy framework that allows for the possibility of a negative interest rate: http://www.bankofcanada.ca/wp-content/uploads/2015/12/press_081215.pdf
And here is their updated monetary policy framework: http://www.bankofcanada.ca/wp-content/uploads/2015/12/framework-conducting-monetary-policy.pdf


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## james4beach (Nov 15, 2012)

andrewf, the CAD is now below 0.72 and you don't think it's disgusting that the Bank of Canada is talking down the currency further?

They're making us poorer by the day.


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## humble_pie (Jun 7, 2009)

OnlyMyOpinion said:


> Sad to read posts based on rank speculation and no facts.
> Here is the BOC's press release announcing a refresh of their monetary policy framework that allows for the possibility of a negative interest rate: http://www.bankofcanada.ca/wp-content/uploads/2015/12/press_081215.pdf
> And here is their updated monetary policy framework: http://www.bankofcanada.ca/wp-content/uploads/2015/12/framework-conducting-monetary-policy.pdf




thankx for the good finds, onlyMO.

linking further within your bank of canada documents, here's the BOC december/15 internal working paper on negative rate outlook. They're looking overseas at denmark, switzerland & sweden. They observe that, for retail bank & mortgage customers in those countries, so far, so good, as the banking industry itself has been able to adjust its fee & repo structures.

if i understand correctly, negative rates have a floor that is not far below zero. They are caused by costs associated with cash such as storage & insurance, but those costs are finite.

again assuming i understand correctly, because the imposition of negative rates on canadian retail customers would create instant national hysterics, the banking industry will seek internal adjustments to offset having to pass on negative rates to the retail banking sector. Swiss banks have indeed passed on negative rates to large commercial customers, but these have been experienced several times before.

i'm posting this with hesitation, because the working paper is really only for those who like their champagne _super-extra-brut-brut-brut_, ie so dry that it would freeze an icicle. It's entirely possible this poor strawberry pie failed to understand. My take was that our little old retail bank accounts are not at risk, but i'd be happy to see more comments on/monitoring of the BOC outlook.


http://www.bankofcanada.ca/wp-content/uploads/2015/12/san2015-2.pdf


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## andrewf (Mar 1, 2010)

james4beach said:


> andrewf, the CAD is now below 0.72 and you don't think it's disgusting that the Bank of Canada is talking down the currency further?
> 
> They're making us poorer by the day.


Are they really talking it down?

Does talking down really work?

You earn USD, so you are not really being made poorer.


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## james4beach (Nov 15, 2012)

I think talking it down works, but that's just the sense I have from the Federal Reserve. I don't have any hard proof.



> You earn USD, so you are not really being made poorer.


My savings & assets are much larger than my income, and nearly all my assets are in CAD.


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## HaroldCrump (Jun 10, 2009)

Of course they are talking it down.

_"Never believe anything until it has been officially denied"_
- Claud Cockburn

*Poloz Rejects Idea Bank of Canada Is Talking Down Currency*


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## HaroldCrump (Jun 10, 2009)

james4beach said:


> My savings & assets are much larger than my income, and nearly all my assets are in CAD.


The Bank of Canada should be defending the dollar.
That is every central bank's primary responsibility, above all mandates, targeting, and other textbook stuff.
Central bank issues and owns the currency - they need to defend it.

A currency chart like this needs defending.
A 30% devaluation has significant negative implications for the users of the currency - people that earn wages, have savings, retirement assets, etc. denominated in that currency.










Compare and contrast with the actions taken by Elvira Nabiullina, the Governor of the Central Bank of Russia in 2014.
She raised interest rates several times to defend the currency in the wake of the oil and commodities crash, the sanctions against Russia post Ukraine invasion, full flotation of the Ruble, and other geo-political events.

At that point in time, the Ruble had depreciated only about 22% vis-a-vis the USD, far less than the 30% devaluation of the CAD$










She took the interest rate all the way up to 17%.
At that time, she was criticized, even laughed at.

But in retrospect, it is now clear that it was not such a crazy move.
Since then the currency has relatively stabilized, and enabled Russia to manage its fiscal situation better.
*Now she is being praised in mainstream media for her actions*.
They have now been able to even cut rates down to 11% this year.

The govt. of Russia also bought large amounts of gold to boost their forex reserves.
Laugh all you want, but for most countries (other than the US), it makes sense to diversify their forex asset base with some gold, in addition to USD.
Note that Canada has almost none.

There are obviously differences in situation, and we certainly don't need to raise our rates to 17%, not even half as much.
But IMHO our central bank should be defending the wealth of consumers and savers.
It is their responsibility.

And BTW, it is not just I and James4Beach calling for this.
Others, more influential people, have been *calling on the BOC to defend the dollar as well*.


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## Chris L (Nov 16, 2011)

Amen Harold. Our government is pathetic. We just roll over and hope that someone else comes in to fix our mess. It's ridiculous.


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## andrewf (Mar 1, 2010)

And who cares about all the people who will be put out of work, homeowners that will default on their mortgages, businesses that would fail, etc. if we raised rates to, what, 10% to 'defend' the CAD?

It is not the BoC's job to peg CAD to USD or any other currency. It is to provide price stability. It really is that simple, folks. You can't ask the BoC to do multiple things with one instrument.


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## Janus (Oct 23, 2013)

andrewf said:


> And who cares about all the people who will be put out of work, homeowners that will default on their mortgages, businesses that would fail, etc. if we raised rates to, what, 10% to 'defend' the CAD?
> 
> It is not the BoC's job to peg CAD to USD or any other currency. It is to provide price stability. It really is that simple, folks. You can't ask the BoC to do multiple things with one instrument.


Agreed. Though I don't see how a fall this hard doesn't bring about some inflation soon.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> And who cares about all the people who will be put out of work, homeowners that will default on their mortgages, businesses that would fail, etc. if we raised rates to, what, 10% to 'defend' the CAD?


There is no need for such extreme measures.
No one is suggesting 10% interest rates - I clearly clarified in my post that we don't need even half as much.
In that BNN video, Sprott asset manager is not calling for anything extreme either.

The first step we would like to see is stop all this childish jawboning talk about negative interest rates.

*BOC has abandoned forward guidance as per their own official policy, is that not right*?

So, *why all this talk about QE and negative interest rates*?

Isn't this a shameless violation of their own policy?

Secondly, restore interest rates back to where they were in Jan 2015 i.e. 1% overnight rate.

Clearly cutting rates is not helping since Canada slipped into recession _after_ the rate cut.
Cutting rates is not helping the over-leveraged oil sands and gas producers.
Cutting rate obviously does not affect commodity prices (we are not the Fed or PBOC).

These two steps should help level off the CAD$

Thirdly, is the option to actually tighten via raising rates - initially 50 bps, and then another 50 if needed.

The federal govt. can also help matters by reducing debt ratios.
Opening up the energy market - both from capital as well as operational perspectives will help even further.

By capital I mean those ridiculous capital controls imposed by the Harper govt. under pressure from the anti-energy zealots.
And by operational measures I mean pipelines east and west to increase exports.

Those kinds of things will do far more to increase our exports (which increase demand for our currency) than bailouts and corporate welfare for inefficient manufacturing/auto companies.

There are many ways available - monetary and fiscal - if they wanted to protect consumers and savers.

All this financial repression monetary/fiscal policy is doing more to create income inequality and wealth disparity than the silly little TFSA room and marginal tax brackets.


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## Janus (Oct 23, 2013)

Harold: I agree with your points, but I think the BoC is just too afraid to risk popping the housing bubble.


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## HaroldCrump (Jun 10, 2009)

Janus said:


> Harold: I agree with your points, but I think the BoC is just too afraid to risk popping the housing bubble.


But they are making it worse by lowering interest rates.
Esp. in the absence of regulatory tightening of the housing market.

The types of regulatory changes they are announcing, such as the 5% increase in D/P above $500K, are completely useless in ensuring a soft landing.
It is understandable that they don't want to pop the bubble, but they are not making the type of changes that are required to bring about a "soft landing"


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## Rysto (Nov 22, 2010)

HaroldCrump said:


> It is understandable that they don't want to pop the bubble, but they are not making the type of changes that are required to bring about a "soft landing"


BoC wields a sledgehammer; their tools don't have enough granularity to engineer a soft landing. If they tried to rein in the housing sector they'd torpedo the rest of the economy (which would surely topple the housing sector anyway).


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## andrewf (Mar 1, 2010)

HaroldCrump said:


> There is no need for such extreme measures.
> No one is suggesting 10% interest rates - I clearly clarified in my post that we don't need even half as much.
> In that BNN video, Sprott asset manager is not calling for anything extreme either.


What if that is the extreme that is required to maintain the peg? How high are you willing to let interest rates go in pursuit of maintaining a peg?




> The first step we would like to see is stop all this childish jawboning talk about negative interest rates.
> 
> *BOC has abandoned forward guidance as per their own official policy, is that not right*?
> 
> ...


They are clarifying what tools they have at their disposal. It seems prudent given how close we are to the zero lower bound. They explicitly said they had no plan to use those measures, just that they were available.




> Secondly, restore interest rates back to where they were in Jan 2015 i.e. 1% overnight rate.


Would raising by 50 bps have a material impact on the exchange rate? If you want BoC to boost CAD back up to 90 cents USD, it would quite likely take a lot more than that.


> Clearly cutting rates is not helping since Canada slipped into recession _after_ the rate cut.
> Cutting rates is not helping the over-leveraged oil sands and gas producers.
> Cutting rate obviously does not affect commodity prices (we are not the Fed or PBOC).


Clearly? You understand that Canada slipping into recession because of a massive shock in the resource sector. BoC lowering rates was not going to prevent that from happening, but it did cushion the blow. What you're saying is like commenting that if your after-tax income increases from one year to the next despite an increase in tax rates, the tax hike did no harm.

Cutting the rate may not have impacted USD price of resources, but the falling exchange rate did increase the CAD price of resources, which is helping resource producers. It also helps the rest of the economy, which picked up a lot of the slack. Ontario was leading Canada in growth as a result of the more export-friendly exchange rate.



> Thirdly, is the option to actually tighten via raising rates - initially 50 bps, and then another 50 if needed.


What if the exchange rate continues to fall? Keep going until we hit your peg value for the 'correct' exchange rate? Do we stop if we hit a 10% overnight rate? This is not BoC's mandate.



> The federal govt. can also help matters by reducing debt ratios.
> Opening up the energy market - both from capital as well as operational perspectives will help even further.
> 
> By capital I mean those ridiculous capital controls imposed by the Harper govt. under pressure from the anti-energy zealots.
> And by operational measures I mean pipelines east and west to increase exports.


You can't fault BoC for not acting outside its mandate. It has no legal control over these factors.




> Those kinds of things will do far more to increase our exports (which increase demand for our currency) than bailouts and corporate welfare for inefficient manufacturing/auto companies.
> 
> There are many ways available - monetary and fiscal - if they wanted to protect consumers and savers.
> 
> All this financial repression monetary/fiscal policy is doing more to create income inequality and wealth disparity than the silly little TFSA room and marginal tax brackets.


This is a whole other conversation (government policy outside of BoC mandate). BoC has a mandate to ensure price stability. You haven't articulated a clear alternative (ie, what do you want them to target), but from what I can discern you want them to maintain a currency peg to USD (at what value?). They can try that, but if you want that to be the case, you have to recognize that in difficult economic times, interest rates really will spike up to 10% or more, and real GDP will crater. Are you really saying you want them to whatever it takes to maintain a peg?


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## gibor365 (Apr 1, 2011)

Just heard one analyst on 680news who said that rate will be cut in Feb/March if oil prices will continue drifting down


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## james4beach (Nov 15, 2012)

Janus said:


> Harold: I agree with your points, but I think the BoC is just too afraid to risk popping the housing bubble.


I think it's worse (more malicious) than that. I think the Bank of Canada explicitly created the housing bubble and is working hard to keep it going.

They want to inflate assets, and real estate is a big "win" in their eyes. The bubble in real estate stimulates credit and transaction activities, it inflates bank balance sheets, it raises household net worth and raises the value of the RE collateral against which loans are taken.

I once had a private conversation with a Bank of Canada representative (Hung-Hay Lau) who gave a presentation at the University of Waterloo in 2007. He seemed very enthusiastic about rising home prices and described to me that it makes everyone wealthier, and everything would be OK as long as home prices rise. He stressed how important it is that home prices rise. I got the distinct impression from him that the Bank of Canada is not in the business of _fighting_ housing bubbles, but rather ensuring that asset inflation occurs.


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