Negative Interest Rates in Canada: What They Mean

Anyone who has ever purchased a vehicle with a car loan or bought a house with a mortgage is familiar with the concept of interest rates fluctuating up or down. Although it is less desirable to have your mortgage rate go up, it’s a fact of life for most of us. But did you know that it’s possible to have a negative interest rate?

While the concept may sound strange, it is a reality in certain countries. For example, Japan had negative interest rates for eight years, ending the policy only recently, in March 2024. But what does it mean when interest rates become negative? And how does it impact your finances? 

In this article we’ll answer these questions, discussing the concept of negative interest rates, why central banks use them, and what they mean for Canadian savers, borrowers, and investors.

Defining negative interest rates

Instead of earning interest on deposits or paying interest on your loan, negative rates flip the numbers. This happens when the policy rate set by the Bank of Canada drops below 0%. However, this doesn’t mean borrowing suddenly becomes free or that savers start paying to keep their money at the bank. In practice, negative interest rates mainly apply to the deposits that commercial banks hold at the central bank.

Why would a central bank use a negative interest rate?

Negative interest rates are typically a last resort used by the central bank. It is a policy under consideration only when the economy is struggling and traditional rate cuts aren’t enough. With a negative policy rate, it becomes more expensive for a conventional bank to hold excess currency at the central bank. In turn, it encourages lending to households and businesses and acts as a source of economic stimulation.

Another reason why the central bank may use negative rates is to counteract deflation or a prolonged period of low inflation. This occurs when inflation is too low for too long, leading to weak demand and slow growth within the economy.

How negative interest rates work in practice

When interest rates become negative, they have an impact at both the central bank level and the commercial bank level.

As we mentioned above, when a central bank adopts negative policy rates, it provides an incentive for commercial banks to lend out their money. This matters because it means they are putting funds back into the economy to stimulate growth instead of having it sit idle and cost them more money. Commercial banks experience the direct impact, offering cheaper lending rates for customers, especially businesses and institutional borrowers as a result.

Retail clients, however, are less likely to see negative rates on their savings due to the societal implications. If savers were penalized for holding cash, it could lead to a mass withdrawal of money, placing financial institutions at risk. As the International Monetary Fund’s Vikram Haksaw explains, “banks can charge other fees to recoup costs, and rates have not gotten negative enough for banks to try to pass on negative rates to small depositors.”

Would negative rates affect Canadians directly?

Should Canada have a negative interest rate, its impact would be wide-reaching.

Though banks avoid charging negative rates to everyday households, they could begin by reducing promotional savings rates. The average Canadian would then see lower returns on their savings accounts and high-interest products. In extreme scenarios, these returns could approach zero. The banks may also introduce new account fees to make up the difference. It’s the large depositors like corporations and institutions that could see negative interest rates.

In the event of negative rates, borrowing becomes attractive. Mortgages and loan rates could decline further, with variable rate products seeing the lowest possible rates. Businesses would also have a reason to borrow, causing increased investment and corporate spending. To compensate for lower borrowing rates, the banks may implement tighter lending standards.

The impact extends to investors who would see lower yields. Instead of earning adequate returns on government bonds and traditional fixed income products, they would have a greater benefit from investing in riskier assets like corporate bonds and equities, which would offer higher relative returns.

Negative rates can also trickle into the country’s currency market and lead to a weaker Canadian dollar. While a lower dollar is less-than-ideal for Canadians investing and traveling abroad, it can help stimulate the economy by boosting the appeal of the country’s products and supporting exports.

Could Canada ever adopt negative interest rates?

As of late 2025, Canada has never had a negative policy rate, but that doesn’t mean it couldn’t. Central banks have an effective lower bound that is equal to “the costs of storing and insuring cash.” In practice, this means that the Bank of Canada has the potential to bring its lower bound to approximately -50 basis points or -0.50%.

Under extreme circumstances, with severe economic stress, the option remains for the central bank. But it’s not their go-to move. Even during the “once-in-a-lifetime shock” of the 2020 Covid-19 pandemic, the BoC never decreased its rate lower than 0.25%.

Pros and cons of negative interest rates

When interest rates slip below zero, there are both benefits and drawbacks. When used carefully, the policy can help support economic recovery, but it can also introduce risks.

Benefits of negative interest rates:

• Encourages borrowing and investment
• Reduces debt-serving costs for both the government and businesses
• Helps fight deflation by boosting spending

Disadvantages of negative interest rates:

•  Reduces returns for savers, with institutional depositors facing negative rates
•  Pressures each commercial bank’s profitability
•  Encourages investors to take on excessive risk
•  Can boost demand for real estate, contributing to higher property prices

Takeaway

Though it may sound unusual, negative interest rates are possible in Canada. That said, it is not a common practice and has yet to occur.

In the event of a major economic downturn, the central bank could turn to this policy tool. For everyday Canadians, it would likely mean lower savings returns and cheaper borrowing. Alternatively, institutions would be the ones who feel the greatest pressure as a result.