The Bank of Canada’s key lending rate is currently standing at 0.5 per cent, and majority of analysts are in agreement that this number won’t drop below zero any time soon.
However, Citigroup argued earlier this year that the BoC is not yet finished with its rate cuts. The multinational institution also said that Canada is likely to implement negative rates within two years. Negative interest is sometimes used to stimulate the economy and prevent deflation.
The BoC would have to set its key rates to negative-2 per cent for mortgage rates to turn negative, which might trigger what the International Monetary Fund fears as a “boom and bust cycle” in the prices of homes and other similar assets.
“As banks’ margins are squeezed, they may start lending to riskier borrowers to maintain their profit levels,” IMF wrote in a blog, as quoted by HuffPost Business Canada.
Some observers pointed out that this would lead to a large housing bubble instead.
Case in point: The Netherlands, which has seen home prices in the capital inflate by 20 per cent in 2015, despite a 2 per cent slowdown in sales.
Leading lender Realkredit Danmark said that it has already paid negative interest to 758 mortgage-holders so far, while the country’s consumer financial protection bureau Kifid ordered another lender to pay borrowers who previously took out mortgages in Swiss francs (following the drop of the Swiss rate to minus-1 per cent).
Banking authorities are sounding the alarm on the fundamental instability that negative interest rates introduce to the market, showing that such a development might not be in the Canadian real estate market’s best interests.
“It’s dangerous. Our households are borrowing way, way too much. It must be reversed sooner than later,” Riksbank head Stefan Ingves said in an interview with the Wall Street Journal.