Strategies to turn economy around
Canada’s stagnating economy could force its central bank to deploy the type of extraordinary stimulus adopted in the U. S., Europe and Japan, according to BlackRock Inc., the world’s biggest money manager.
With a commodity prices collapse that probably sent the country into recession in the first half showing no signs of letting up, the Bank of Canada may need to follow its developed- nation peers with quantitative easing, according to Aubrey Basdeo, BlackRock’s head of Canadian fixed- income.
The Bank of Canada has already cut its benchmark interest rate twice this year to turn around the worst economic streak since the country’s last recession. With an overnight rate now at 0.5 per cent, it’s nearing the point where other central banks decided to begin bond buying programs to force rates lower still and help companies borrow more cheaply.
Bank of Canada governor Stephen Poloz told reporters July 15 he has “a fair bit of room to manoeuvre” if more stimulus is needed, citing tools such as quantitative easing, while noting that “forward guidance” would probably be the bank’s first unconventional measure.
While Basdeo said he agrees with the Bank of Canada’s call for growth to rebound a bit later this year, he looks at the broader global economic landscape, and China in particular, as signs Canada’s resource- focused economy may be in for longer- term stagnation.
The North American benchmark for crude oil, Canada’s largest export, fell Tuesday to its lowest point in six years as China was forced to devalue its currency to boost its flagging economy. The discount Canadian oil producers receive versus U. S. benchmarks reached the most in a year.
For Basdeo, that shaky economic outlook demands investors charge Canadian companies more to borrow money. Corporate borrowing costs have fallen to near record lows in absolute terms this year, thanks to the central bank’s rate cuts.
While quantitative easing is “technically on the table” if Canada’s economic problems persist, it’s probably the fourth or fifth line of defence, Avery Shenfeld chief economist at Canadian Imperial Bank of Commerce, wrote earlier this month.