Below-zero weather could set stage for below-zero interest

New ‘lower bound’ rate might lead to bank customers burying their cash in their backyards

The benefits of milder winter days are many.

You can turn down the heat blasting out of that baseboard heater, or lower the temp on the thermostat, or get back on the bike.

Or sink a shovel into the backyard. Not to cover up the precious hellebore that you neglected to protect in the final days of autumn, but to create a cash-ready pit just in time for the days of negative interest rates, mattress stuffing being very 19th century. Negative rates are not a certainty. But this is not a frivolous consideration. As Bank of Canada governor Stephen Poloz heads toward this month’s rate-setting announcement, we recall that he laid the groundwork in December in announcing that the bank now believes that the “lower bound” for the country’s policy rate is about minus 0.5 per cent.

“But it could be a little higher or a little lower,” Poloz said in a speech at the Empire Club.

This is untilled earth, at least in these parts. With the events of this past week dimming the lights on Poloz’s declaration that “Canada’s outlook is encouraging,” and with the new government’s promises of infrastructure renewal not yet defined, interest rates once again are the most obvious mechanism for spurring growth.

But they’ve been ground to near zero, which most folks, rather sensibly, equated with the bottom. Apparently we were wrong about that.

How effective a go-negative strategy might be is another matter.

The Swiss National Bank announced a negative deposit rate last December, effectively charging banks 0.25 per cent for “sight deposits” — that is, deposits that can be withdrawn without penalty, as in cash or near-cash. Within a month, the rate had been reset from minus 0.25 per cent to minus 0.75 per cent.

The European Central Bank went negative seven months earlier. Sweden is in this group, as is Denmark, which joined Switzerland at minus 0.75 per cent last January, making the two countries host to the lowest monetary policy rates on the planet. (Denmark made a 10basis-point adjustment to minus 0.65 per cent this week.)

It’s a balancing act. If banks are going to be penalized for parking cash, an obvious behavioural response would be to stop doing that. And if banks do less of that, the result should be stimulating credit to the economy.

There are aspects of the economy that need no such goosing. The Canadian consumer is already indebted at a historically high level. One of the early fears of the negative interest rate strategy in foreign lands was that consumer debt could become dangerously high. Knocking rates lower has the singular appeal of boosting the borrow-spend-expand-demand cycle.

The flip side: If interest rates fall below zero, could those same consumers face the unconventional prospect of being charged by banks on their deposits?

This is where burying cash in the backyard comes in. Or sock stuffing. Or cutting the insides out of books.

Credence was lent by the announcement out of Alternative Bank Schweiz AG — a small bank that “emphasizes ethical principals instead of maximum profits” — that depositors would be charged for keeping money in their accounts as of this month.

Thus far, Bank Schweiz appears to be the exception. Last summer, Danmarks Nationalbank defended negative rates by stating, in part, that banks have not passed on negative rates of interest to households and that there had not been any “unusual” increase in the demand for cash.

Just think of the troubles with storage and transportation, the bank said. Money can be so cumbersome.

This, too, is Poloz’s expectation. In his December speech, he said that behind the interbank rate, “there’s a full financial system for both lending and savings which generally finds that interest rates don’t go below zero for savers.”

Yet how such a scenario would play out in Canada is nevertheless theoretical.

Poloz was at pains to underscore that negative rates are an “unconventional” monetary tool. (Some have used the word “radical.”) Over in Denmark, the national bank says that while negative rates were regarded as a “curiosity” they have now “almost become ‘business as usual.’ ” That’s how quickly perceptions change.

One more point: In the spring of 2009, Harvard economist Gregory Mankiw raised the negative rate strategy in the New York Times as a tool that could be deployed by the ailing U.S. economy.

He acknowledged that this might strike readers as absurd, or the “concoction of some impractical theorist.” How times have changed. The American economy needs no such help now.

If banks are going to be penalized for parking cash, an obvious behavioural response would be to stop doing that