Canada could adapt to negative rates: BoC

It’s long been accepted that interest rates can’t fall below zero because of the impact that negative rates can have on businesses and investors.

Read: Let’s keep rates positive

However, eliminating the possibility of negative rates “limits a central bank’s ability to provide further stimulus to the economy through conventional decreases,” says the Bank of Canada’s 2016 spring review.

Further, the view that interest rates shouldn’t be negative “has been contradicted by recent international experience: rates have become negative in Sweden, Denmark, Switzerland, the euro area and Japan,” says the BoC. This is why the Bank announced in December that it would consider further decreases in a crisis scenario.

The review notes, “The European experience suggests Canadian financial markets could also adapt to negative rates.”

The central bank also discusses issues like why companies are reluctant to reduce employee wages, even when there’s a recession. It says, “Employers often cite the impact that a cut in nominal wages could have on worker morale and productivity […] But if employers are unwilling or unable to reduce nominal wages, their only recourse is to lay off workers, leading to an increase in the number of unemployed.”

Typically, says the BoC, “One way to mitigate [these] adverse effects […] is higher inflation, which can lower real wages without a corresponding reduction in the nominal wage.”

Check out the full report for more on how central banks are using conventional and new tools, and for a look at how their role is changing.

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