Bank of Canada could impose subzero interest rates on Canadian economy

Stephen Poloz, head of the Bank of Canada (BoC), has officially put negative interest rates on the table. In the event of a major economic collapse, the BoC would institute negative interest rates for the first time in its history.

Following in the footsteps of Sweden and Denmark, is this such a wise monetary policy move? It’s a central bank so the obvious answer is no.

Delivering a speech to the Empire Club of Canada in Toronto on Tuesday, Poloz explained that the mechanism of negative interest rates is just one of four “unconventional monetary policy measures” it may deploy if the Great White North undergoes a significant financial crisis. He added that it’s unlikely Canada would introduce such a measure because he expects the Canadian economy to grow in 2016 and 2017.

The other three policy measures include presenting guidance on the future path of its benchmark interest rate policy, extending credit to important economic sectors and stimulating the economy by establishing a Federal Reserve-like quantitative easing (QE).

“We don’t need unconventional policies now, and we don’t expect to use them,” Poloz said. “However, it’s prudent to be prepared for every eventuality.”

The current trend-setting rate stands at 0.5 percent, and Poloz pledged to never dip rates to under -0.5 percent. In order to get to subzero rates, there would have to be something similar to the Great Recession in 2008 and 2009.

What’s apparent is that Poloz has never read the work of prominent economist Walter Block, who wrote in “Negative Interest Rate: Toward a Taxonomic Critique“:

“A basic principle of Austrian economics is that the originary rate of interest (the rate of discount of future goods compared to present, otherwise identical, goods) can never be negative. The reason for this arises not because capital is productive, nor out of man’s psychology. Nevertheless, in spite of the foregoing, there are many benighted souls who insist upon the possibility of a negative rate of originary interest. They are continually discovering cases which “prove” their conclusion. The number of such examples has reached such proportions that it seems advisable to take account of them in a systematic way. Accordingly, this paper is devoted to classifying them in a manner that makes the most intuitive sense: in accordance with the economic errors which are necessarily committed in their very statements.”

Poloz’s comments come as the Federal Reserve is likely to raise interest rates at next key Federal Open Market Committee (FOMC) meeting next week. It also comes as the European Central Bank (ECB) further dipped into negative territory.

As the chart (courtesy of the Financial Post) above shows, Sweden’s Riksbank has interest rates of -0.35 percent, Denmark’s National Bank maintains a rate of -0.75 percent and the Swiss National Bank (SNB) interest rate remains at -0.75 percent.

What exactly happens when a central bank adopts a subzero rate? It costs banks more to hold your money, and thus charge your deposits. Evidently, it’s a further attack on savers and retirees. The Swedes are so concerned over the negative rates happening that they’re putting their cash in microwaves (SEE: What the heck is happening in Sweden? Negative rates, cash bans, housing bubble and enormous debt). That’s what Canadians may have to do: store their money in their igloos!

Fed Chair Janet Yellen conceded (SEE: Yikes! Janet Yellen would consider negative interest rates if economy collapses) that she is open to subzero rates in the event of another economic catastrophe.

This is proof of one thing: central bankers are the most dangerous people alive. Terrorists aren’t our biggest problem but rather central bankers who think they’re the smartest people in the room. Ostensibly, the more they talk the less confidence anyone should have in this institution.