Negative Rates Are Negative in More Ways than One

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To say we are living in interesting times for monetary policy is an understatement. Today’s official interest rates are unprecedented, thanks to the spread of so-called NIRP (negative interest rate policy) around the world.

To NIRP or not to NIRP is not a passing academic abstraction to be comfortably ignored by the corporate world. Indeed, executives should be paying attention to what central bank policy wonks are up to these days because negative rates come with negative implications for running a business.

Now, a negative interest rate seems like a bizarre concept. After all, it doesn’t make sense for someone to pay someone else to use their money. So for people unfamiliar with NIRP, it should be stated that your financial institution is not on the verge of paying you to take out a mortgage or charging you to hold a deposit. The interest rates we are talking about are policy rates a central bank pays financial institutions in its jurisdiction for holding their deposits.

Until recently, zero was the lower bound on policy rates. But lately, a number of central banks representing about 25 per cent of global GDP have gone negative. The European Central Bank, for example, is minus 0.4 per cent, meaning banks in the Euro Area pay 0.4 per cent to have their deposits held; Japan is minus 0.1 per cent; Switzerland minus 0.75 per cent; Sweden minus 0.5 per cent; and Denmark minus 0.65 per cent.

And make no mistake — negative policy interest rates were put on the table in Canada late last year, when the Governor of the Bank of Canada weighed in with a view on the topic in a speech to the Empire Club: “We have seen the experience of several central banks, such as the European Central Bank and Swiss National Bank, which have adopted negative policy interest rates. There, we’ve seen that financial markets have been able to adapt and continue to function. Given these and other developments, the Bank is now confident that Canadian financial markets could also function in a negative interest rate environment…. We now believe that the effective lower bound for Canada’s policy rate is around minus 0.5 per cent, but it could be a little higher or lower.”

What should Canadian executives make of the possibility of negative policy rates? Simply put, they should be very concerned.

The goal of negative policy rates is to make not using money costly for banks and, instead, get them to lend it out, thereby stoking economic growth, job creation, consumption, investment, exports, a lower currency value, and inflation. And they are clearly a borderline-desperate move to psychologically and otherwise shock an economy out of a protracted stagnation. Hello Europe and Japan! Memories are still vivid of the 1930s, when failure to re-ignite economic activity led to the Great Depression.

If the Bank of Canada looks like it might actually be headed negative on its policy rate, executives should take note. Simply put, this means the central bank is very worried about the macroeconomic conditions that make or break businesses. It also means the Bank of Canada may not be confident that politically motivated fiscal policies involving deficits, government spending and taxation will support economic growth. As a result, executives should be prepared to consider comprehensive, action-oriented reviews of important aspects of their businesses, including working capital, capital spending, financing, acquisitions, product pricing, compensation and long-term contracting.

Problems with negative policy rates, of course, go well beyond sending a signal that a nation’s monetary officials may consider the nation’s economic woes untreatable by conventional therapies. Indeed, because the world’s experience with negative policy rates is extremely sparse, these policies are fertile ground for the law of unintended consequences. (On that note, if you’ll permit someone who has taught business for more than four decades a digression, I highly recommend executives read Edward Tenner’s 1997 book Why Things Bite Back: Technology and the Revenge of Unintended Consequences. It’s an oldie, but a goodie.) Also keep in mind that because policy rates are likely to be taken negative a bit at a time, they are susceptible to “slippery slope” and “tipping point” risks.

Furthermore, negative policy rates are very tough on bank margins and profitability. And weakened banks are no help in a stagnant economy. And they encourage people to do unusual things with their money like storing it in a safe, or otherwise hiding it, on the grounds that it has no return.

Finally, negative policy rates turn the likes of time-honoured accounts receivable and accounts payable policies upside down in that you may now want to receive money as late as possible and pay it out as soon as possible.

Before becoming a business prof, I majored in mathematics. And the NIRP drama playing out today reminds me a bit of the history of negative numbers. It took mathematicians several hundred years to come to grips with the related complications and peculiarities (try figuring out the square root of minus one). And you will probably be able to say the same about central bankers years from now when writing the history of negative policy rates.

The world today is not conducting business as usual. Monetary policy makers are navigating uncharted waters and business executives are being taken along for the ride. It is time to batten down the hatches.

About the Author

John S. McCallum is Professor of Finance at the I. H. Asper School of Business, University of Manitoba, and former Chairman of Manitoba Hydro. Contact

2 responses on “Negative Rates Are Negative in More Ways than One

  1. Antonio Caldas

    Thanks, very clear and informative. Many people are unclear about what zero IR means and what is the impact on individuals. We are in fact living unprecedented times and being uncertainty one of the biggest risks.

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