Normally when depositors put money in a savings account with a bank, they earn money on that deposit.
If they were to deposit $100 at a 0.5% interest rate, for example, they would have $100.50 at the end of the year.
A negative interest rate would work the other way — if they were to deposit $100 with a negative 0.5% interest rate, they would end up with $99.50 in your account in a year's time.
The concept of paying to have someone look after your savings is a strange one to wrap one's head around, but it's one that many are now pondering after news this week that the Bank of Canada says it could theoretically move its benchmark interest rate below zero as a new weapon in its policy-making toolkit.
But the reality is that even if negative rates comes to Canada in the near future, nobody will be paying you to take out a mortgage anytime soon. That's because the banks are likely to swallow that cost without passing it on in any direct way
In practice, if a bank decides to park its money with the Bank of Canada, a negative interest rate would mean banks are essentially paying for the privilege to do so.
With a hypothetical rate mentioned Tuesday by central bank Governor Stephen Poloz of minus 0.5% down from the current rate of 0.5%, that would mean banks depositing their money with the central bank would lose 50 cents for every $100 they deposited.
But if banks were being "punished for saving," as one expert puts it, and losing value on what they keep on deposit with the central bank, they would essentially be encouraged to stop hoarding their cash.
In turn, this could lead to banks lending more to consumers and businesses, said Patti Croft, an independent economic analyst and former chief economist of RBC Global Asset Management.
She said negative interest rates wouldn't affect consumers looking to save their money, meaning they wouldn't have to pay the bank to store their cash, because interest rates offered by banks to savers "never go below zero."
