Next country with negative rates could be… Canada?

In the wake of recent rate cuts by the Bank of Japan and the Swedish central bank, U.S. Federal Reserve Chair Janet Yellen told lawmakers that she was open to the possibility of introducing negative rates.

However, analysts say there are major central banks in addition to the Fed that may opt to go negative.


Negative interest rates
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Central banks differ in which interest rate they use as their benchmark, so negative rate policies can take different forms — although all were rare prior to the global financial crisis of 2007-08.

These policies were first adopted as a policy experiment in Europe but appear to be gaining traction further afield.

In effect, they mean that commercial banks are charged to store cash with the central bank and are intended to incentive greater lending by banks to businesses and individuals at times of disinflation, deflation of low growth.

Central banks that have gone negative:

  • Bank of Japan: Rate is minus-0.1 percent for some reserves
  • Danish National Bank: Deposit rate is minus-0.65 percent
  • European Central Bank: Deposit rate is minus-0.3 percent
  • Swedish National Bank: Main interest rate is minus-0.5 percent
  • Swiss National Bank: Main interest rate is minus-0.75 percent

The Bank of Japan adopted a negative rate policy for the first time in January, shocking markets, and this Thursday, the Swedish Riksbank cut its benchmark rate deeper into negative territory, to minus-0.5 percent.

CNBC takes a look at which bank might be the next to go into negative territory.

Canada

Bank of Canada
Patrick Doyle | Bloomberg | Getty Images

The Bank of Canada is the most likely of the major central banks to opt for negative rates this year or next, Marc Chandler, the head of foreign exchange markets strategy at BBH, told CNBC on Friday.

"I am not saying the Bank of Canada will, but that is the most likely candidate of those that are not there yet… I do not see this as anything but very low risk in the U.S.," he said.

Canada's targeted overnight rate is already low, at 0.5 percent, and the Bank of Canada has prepared markets for the possibility of negative rates by discussing how they might work as a policy tool.

It said in December that the lower bound for the policy interest rate was around minus-0.5 percent.

"In the unlikely event that the economy was hit with another major negative shock, the Bank could implement unconventional monetary policy measures. These include forward guidance on the future path of its policy rate, stimulating the economy through large-scale asset purchases (commonly referred to as quantitative easing), funding to ensure that credit is available to key economic sectors and moving its policy rate below zero to encourage spending," the bank said in a statement.

The bank will update its rate target on March 9.


Norway

Norges Bank
Tomm W. Christiansen | Bloomberg | Getty Images

Sweden and Denmark's neighbor, Norway, is another candidate to introduce negative rates, Chandler told CNBC.

"Norway would be the second choice (after Canada). But its problem is growth not deflation," he said.

Norway has held its key policy (sight deposit) rate at 0.75 percent since September 2015. The Norges Bank warned in December that the rate might be lowered in the first half of 2016.

As of September, Norway already has a negative reserve rate of minus 0.25 percent. This is the rate paid on deposits at the Norges Bank that are in excess of the quota for sight deposits.

The bank is due to announce its next rate decision on March 17.


Israel

Ariel Jerozolimski | Getty Images

Israel is the one country for which Citi's base case scenario is the introduction of negative rates this year. It sees the Bank of Israel cutting its policy rate to minus 0.1 percent from 0.1 percent, roughly within the next three months.

The country has suffered deflation since 2014 and consumer prices fell by 0.1 percent on the previous month in December.

"Given the large and long-lasting inflation undershoot, we expect that tolerance will have to end soon and expect some combination of negative policy rates and more aggressive FX intervention," Citi economists led by Ebrahim Rahbari said in a report published on Thursday.

The Bank of Israel will update its rate decision on February 22.

Other than Israel, Citi cites the Czech Republic, Norway and Canada as the countries' most likely to introduce a negative rate within the next one-to-two years.

UK

The Bank of England
Simon Dawson | Bloomberg | Getty Images

According to U.K.-based Oxford Economics, markets are now pricing in a greater than 50 percent of a U.K. rate cut in 2016.

This is a turnaround given that at the end of 2015, the U.K. was seen as the next major central bank likely to hike in the wake of the Fed's move in December.

As with many advanced economies, the U.K. has had very low interest rates since the global crisis — so a comparatively small cut would take rates to zero or negative.

"I guess in the case of the U.K., negative rates could not be ruled out. It is certainly not our base case, but if say there was a global recession and also some domestic weakening in the economy, it is conceivable the MPC (monetary policy committee) would have to cut rates into negative territory," David Tinsley, U.K. and European economist at UBS, told CNBC on Friday.

The Bank of England's has held its main bank rate at 0.5 percent since March 2009. It will make its next decision on March 17.

The U.K. economy is smaller and more open than the U.S., so it might benefit more from the weakening impact of negative interest rates on the exchange rate, said Tinsley.

However, the MPC has previously been concerned that negative rates might hit financial institutions' ability to offer loans, he added.

Czech Republic

Martin Divisek I Bloomberg via Getty Images

Citi says the Czech Republic may introduce negative deposit and repo rates of around minus-0.1 percent or even minus-0.2 percent at some point between April and June this year.

When the Czech National Bank met in the first week of February, it raised the possibility of introducing negative rates.

"The Bank Board again also discussed the possibility of introducing negative interest rates in light of the widening of the interest rate differential vis-à-vis the euro area and developments in domestic financial markets," the bank said in a statement on February 4.

A possible catalyst for negative rates could be a further rate cut by the ECB. Although the Czech Republic is not yet part of the euro zone, its economy is closely tied and two of its main trading partners, Germany and Slovakia, are part of the bloc.

The national bank will publish its next policy decision on March 31.

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