Canada's central bank makes its next interest rate announcement in December, The governor of the Bank of Canada floated the idea that if conditions warranted, the bank could consider moving interest rates into negative territory.

Economist Jim Stanford explains.

I am holding a recent report from the Bank of Canada, Canada's central bank.

The title is a mouthful framework for conducting monetary policy at low interest rates, but the content is pretty dramatic.

The report lists several things that the bank could do if Canada experienced another economic meltdown.

And the way things are going these days, that's certainly a possibility.

One of the proposals the bank makes is quite surprising.

In the event of a recession, they would cut interest rates, no surprise there.

But because interest rates are so low already, in fact, they're almost zero.

If they were to cut them further, they would actually push the interest rate below zero into negative territory.

So what are negative interest rates anyway?

Well, think about how borrowing usually works.

You go to the bank and you borrow some money.

Let's say $100 you're gonna keep the money for a certain period of time.

Let's say, for a year after the year, you go back to the bank, give back the money that you borrowed.

But that's not the end of the story.

You also have to pay interest on your loan.

So let's say the interest rate was 1%.

Just to keep the math simple, you owe them another dollar.

And that's the cost of borrowing the $100 for the year.

That's how interest rates usually work.

But what about negative interest rates?

Okay, here's what happens.

I go to the bank.

I borrowed the same money, the same $100.

I keep it for the same period of time for a year, and then I pay it back to the bank at the end of the year.

But guess what?

Now?

The interest rate is negative.

Let's say it's minus 1%.

That means the bank gives me the loony as negative interest on the loan instead of me paying for the money that I borrowed.

So I actually made money just by borrowing from the bank and then paying it back.

This unusual situation, in a way, is an unintended consequence of many years of low inflation policy that the bank itself has followed.

They have succeeded in wrestling inflation to the ground.

We've had very low inflation, 2% a year or even lower for many years.

There's benefits of that.

But there's also some costs.

And one of the drawbacks is if the economy enters a very weak period, the Bank of Canada doesn't have much room to cut interest rates before they hit zero.

In economics, that problem is called the zero lower bound.

So an example.

We entered a major global downturn in 2008.

Our interest rate was 4.5%.

At that time, the bank cut it and cut it and cut it.

Today it's only 0.5%.

But guess what?

The economy is still very weak, so if they want to stimulate more borrowing by businesses or consumers now, they think they'll have to push interest rates below zero.

Hence we get negative interest rates.

But can the average consumer really benefit from this?

Here's the catch.

Like most everything else in the financial world, how things work for the average consumer is quite different from how they work for the banks and the brokerages and the other big players on Bay Street.

For average consumers, we will never experience negative interest rates.

We will never be paid to take out a mortgage or to take out a car loan will never have the credit card companies giving us money for borrowing.

Negative interest rates are intended for a different type of borrowing.

Big banks, borough billions of dollars from each other all the time, even for very short periods of time, like overnight.

The system is called interbank lending, and it's that type of lending that would benefit from negative interest rates, as envisioned by the Bank of Canada.

I don't think the impact of negative interest rates will be very large for several reasons.

First of all, average consumers are not going to get negative interest rates.

Their interest rates may come down a bit.

But remember, interest rates have already been very low for many years, and there's only so much borrowing that businesses and consumers can take on.

The bigger problem in our economy is an unwillingness to spend, particularly in the business community, because they're worried about the future.

So in short, you can't push money into the economy by cutting interest rates.

You need a pole factor.

You need businesses or consumers who are willing to take that money and spend it.

And right now that willingness is not there because people are so worried about the future.

And then when they hear the Bank of Canada talking about negative interest rates, they might worry about the future.

Just a little bit more.

Helped TV Oh, create a better world through the power of learning, Visit support TV, oh dot org's and make a tax deductible donation today.