Negative Rates Are Negative in More Ways than One

Description

Today’s official interest rates are unprecedented, thanks to the spread of negative interest rate policy around the world. Negative interest rate policy is not an academic abstraction to be ignored by the corporate world. Indeed, negative rates come with negative implications for running a business. Until recently, zero was the lower bound on policy rates. But lately, various central banks representing about 25 per cent of global GDP have gone negative. Negative policy interest rates were even discussed in Canada last year by the Bank of Canada’s governor. The goal of negative rates is to make not using money costly for banks and to get them to lend it out, thereby stoking economic growth, job creation, consumption, investment, exports, a lower currency value, and inflation. If the Bank of Canada looks like it might be headed negative on its policy rate, this means it is very worried about the macroeconomic conditions that make or break businesses. It also means the Bank of Canada may not be confident that politically motivated fiscal policies involving deficits, government spending and taxation will support economic growth. As a result, executives should be prepared to consider comprehensive reviews of important aspects of their businesses, including working capital, capital spending, financing, acquisitions, product pricing, compensation, and long-term contracting. Negative policy rates are very tough on bank margins and profitability, and weakened banks are no help in a stagnant economy; they encourage people to do unusual things with their money like storing it in a safe or hiding it. Finally, negative policy rates turn time-honoured accounts receivable and accounts payable policies upside down such that you may now want to receive money as late as possible and pay it out as soon as possible.