Dealmaking In A Negative Interest Rate Environment

The term "negative interest rates" was introduced into the Canadian vocabulary on December 8, 2015, when the Bank of Canada announced that it would be willing to use this "unconventional monetary policy tool" in the event of economic crisis. With the current benchmark interest rate of 0.5% already near historic lows, this announcement suggests that it has the potential to drop much lower – even below zero. The Bank of Canada stated that the effective lower limit, or "lower bound", is now set at negative 0.5%.

While the Bank of Canada stressed that there are no current plans to take such a drastic step, this possible foray into negative territory is not unprecedented in developed countries. The European Central Bank cut its key interest rate below zero in 2014 and has since been joined by the central banks of Denmark, Sweden, Switzerland and, most recently, Japan. Switzerland currently has the lowest rate at negative 0.75%.