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How Negative Interest Rates Could Affect Your Savings Account

Earlier this month, the Bank of Canada (BoC) made news by suggesting that it could potentially lower interest rates below zero, going against a previous announcement in 2009 that the lowest rates could go would be 0.25%. In 2015, the Bank of Canada interest rate has already been lowered twice, from 1% to 0.5%, so this announcement sets the expectation that the floor for interest rates is lower than we thought before.

This doesn’t necessarily mean we can expect negative rates in the near future. But with the Canadian dollar sitting near its lowest level in almost 12 years and two previous rate cuts not quite giving the economy the boost it needed, there’s now at least some possibility of the BoC implementing negative rates. And while this move might be unprecedented in Canada, we wouldn’t be the first country to drop rates below zero. As a matter of fact, the European Central Bank, which controls lending for the 18-country euro zone, lowered its rate to -0.1% in 2014.

While negative rates are intended to encourage banks to invest and spend, they tend to have the opposite effect on secure-income investors. As rates fall, the returns on fixed-income and guaranteed investments will also tumble, not to mention savings accounts. The good news is that rates on GICs and banking products aren’t going to fall below zero. Banks won’t be charging customers negative interest on their high-interest savings accounts, although it’s likely that these “high-interest” products—which currently max out at 1.8%—won’t live up to their names if rates turn negative.

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Right now, with the Bank of Canada’s benchmark interest rate at 0.5%, the Big Five banks offer savings accounts with rates ranging from 0.45 to 0.65%. Furthermore, it’s worth noting that many of these accounts have tiered interest rates, where you must have a minimum balance of $5,000 to receive the aforementioned rates. The CIBC eAdvantage Savings Account, TD Bank High Interest Savings Account and Scotiabank Scotia Power Savings Account currently don’t pay any interest if your balance is below $5,000. If you don’t have much money set aside for savings, you might want to consider GICs over high-interest savings accounts.

There are a couple of savings accounts that do stand out. The Scotiabank Momentum Savings Account currently offers a tiered interest rate of 1.5% on balances above $5,000. But for savings less than that amount, the interest rate is only 0.1%. BMO is currently offering the Bank of Montreal Savings Builder Account with an interest rate of 1.30%—provided you save at least $200 a month. Otherwise, the rate is a much more modest 0.3%. And the highest rate you’ll find right now is 1.8% on the AcceleRate Financial AcceleRate Savings account.

So what happens when rates drop below zero? With most of the big banks offering tiered rates no more than 15 basis points above the BoC’s overnight rate, it’s likely that “high-interest” savings accounts could provide very minimal returns if rates were to fall to -0.25%. In Switzerland, where rates currently sit at -0.75%, the Raiffeisen Switzerland Savings Account currently pays 0.1% in interest, while its major competitor, Credit Suisse, isn’t offering any interest on its savings account.

Perhaps we should keep in mind that the BoC has recently lowered its rates by 25 basis points at a time. At that pace, it would take three additional cuts for rates to go negative. And even after the downturn in oil prices, economists are predicting a Bank of Canada interest rate hike in 2017, so it’s not too likely we’ll see negative rates after all.

Flickr: Alex Vakulenko

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