What You Need to Know About Negative or Sub-Zero Rates

Wondering what everyone’s talking about when they reference sub-zero rates? You’re not alone – it’s a confusing topic, but we spell out what it is and what it means for you.


Over the last few months, financial pundits have been talking at length about negative interest rates. In Europe, several countries already have sub-zero rates, while Bank of Canada governor Stephen Poloz said in December that he wouldn’t rule out taking our rates into minus territory. But for all the talk, there are two things still unclear to many Canadians: Just what exactly are negative rates and how might they affect me?

Before we get into the details, here’s some background. Up until a couple of years ago, the idea of rates falling below zero was purely academic, with a low likelihood of it actually happening.. However, the global economy hasn’t grown as quickly as expected after the recession and many countries, especially in Europe, are still suffering, forcing central banks to come up with new stimulus-inducing ideas.

At first, countries simply lowered their interest rates to near zero. Why? Because borrowing is based on the overnight interest rate and the lower it goes the cheaper it is to take a loan out from the bank. If businesses and individuals can borrow at less expensive rates, then they’ll invest back in their companies and buy houses or other items. At least that’s the idea.

Here at home, the Bank of Canada cut the interest rate twice – from 1% to 0.75% in January 2015 and then to 0.5% in July – to help the economy grow during the oil price plunge. As energy prices fell even further, the Bank of Canada said that it could continue cutting rates not just to zero, which would be unprecedented, but into negative territory.

At least for the moment, though, Canada may be in the clear. With oil prices rising and the Canadian dollar strengthening, there’s now a more positive outlook for growth. The BoC kept its benchmark lending rate at 0.5% at its most recent meeting in April.

However, some countries have gone negative. The Bank of Japan and the central banks of Sweden, Denmark and Switzerland have all pushed overnight rates below zero, with the The latter nation having the lowest rate in the world at -0.75%.


The idea behind negative rates comes from the same place as low rates – encourage people to borrow cheaply and then spend more money to increase economic growth. However, negative rates can give financial institutions more incentive to invest.


Banks, which, of course, have a lot of money, store cash at the central bank, not unlike when we keep money in a savings account. In a negative rate environment, though, these companies have to pay the central bank to store their money. The hope is that rather than getting charged, the bank will take what they’ve been keeping and spend it on either growing their business or loaning it out to other operations and people.

Ideally, central banks wouldn’t have to take these kind of measures. Lowering rates to near-zero was supposed to encourage banks to loan money to those wanting to take advantage of the cheaper borrowing environment, but financial institutions have been reluctant to lend and corporations have been concerned about borrowing. Why? Because there’s still a lot of uncertainty around where the global economy is headed.

When businesses get nervous they stop taking out loans and reduce investments; when banks get worried, they tighten lending. Negative rates are an attempt to force everyone’s hand – if the banks have tighter margins they might be more willing to consider deploying capital, through additional investments.


There are two sides to the story for consumers. In some ways, sub-zero rates are positive. People will be able to borrow money at extremely low rates, whether that’s through a line of credit or a mortgage. Some credit cards and auto loans could come with much cheaper rates, too. In Denmark, lenders are actually paying people to take out a mortgage. (If a mortgage rate is, say, -0.2%, then the homeowner gets paid instead of the bank.)

The flipside of this relates to savings and investing. Any money stored in a savings account will earn next to nothing on deposits. It’s likely people won’t have to pay money to keep their cash in an account, but they won’t make much either.

It also impacts more conservative income-producing securities like money market funds and Guaranteed Investment Certificates. Rates are already low on these funds, but they’ll fall even more if rates drop further, making it a challenge to earn an income on less risky investments. (Lower rates, however, are usually positive for stocks, so equity values could rise.)


While negative rates are a possibility, Canada’s economy would have to get much worse for the central bank to implement this kind of policy. Since mid-February, oil prices have climbed by about 50% and that’s good news for our GDP. Many economists now think that first quarter growth in Canada could come in at between 2.5% and 3%.

While the BoC is holding steady now, it’s likely waiting to see how oil prices fare and how much of a boost a lower loonie gives our manufacturing sector before moving the overnight rate in either direction.


Still, Canadians may want to talk to their advisors about how lower rates could affect their portfolios, and it’s likely there will be some impact. First of all, equities tend to rise in more attractive rate environments, while fixed income yields tend to fall. There’s also some potential for higher account fees and charges if banks have to cover any payments made to the central bank.

When it comes to more specific opportunities, gold starts to look better when rates fall as the yellow metal tends to do well in an uncertain economic environment. It also doesn’t pay dividends, so when payouts fall on, say, bonds, it evens the playing field between yielding and non-yielding investments.

High-yield bonds – debt issue by corporations – also start looking more attractive. A skilled advisor can help investors find bonds that are at a lower risk for default, but still pay decent distributions. Dividend stocks look better, too. The lower yields go, the more people look to dividends for monthly income.

All that said, the negative rate trend hasn’t swept the planet, and as long as the global economy grows it likely won’t. However, with the possibly of this still looming, it’s a good to know what might happen if rates do indeed drop further.

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