Economy may need lower interest rates to recover

Former Bank of Canada adviser says weak growth and fall of oil prices could force lending benchmark even lower

The Bank of Canada may be forced to cut its benchmark interest rate in the coming year as it steps in to support the faltering economy, a portfolio manager at Fidelity Investments says.

The Canadian dollar is rising relative to the U.S. dollar as oil prices have rebounded, David Wolf said.

That continued appreciation puts a damper on the hopes that exports to the U.S. will help revive the Canadian economy. That could prompt Bank of Canada governor Stephen Poloz to join global peers in cutting the benchmark interest rate to zero, Wolf said Thursday during the Bloomberg Canada Economic Summit in Toronto.

“I wouldn’t be surprised if rates here end up where they are everywhere else in the developed world, which is basically at zero,” Wolf told the business crowd.

The comments by Wolf, who served as adviser to the governor of the Bank of Canada from 2009 to 2013, go against the views of most Canadian economists, and caused a stir at the annual conference.

“As we go forward, I think there are some significant challenges to Canada’s economy. Growth has been quite weak. The oil price decline is still being underestimated in its impact,” Wolf said.

Low oil prices could have a marked impact on “a highly indebted Canadian economy with an overdone housing market and less-competitive-than-ideal manufacturing sector,” he added.

“We already have very low rates,” Wolf continued. “We have an economy that may need some more help, and the Bank is probably going to have to be the one to give it, which means that rates may have to decline from here.

“They don’t have to decline very far to get us in the range of zero.”

The Bank of Canada slashed its benchmark rate on overnight loans to 0.25 per cent in 2009 in the wake of the financial crisis.

The rate now stands at 0.75 per cent, and the next meeting to decide monetary policy is scheduled for May 27.

Economists see Poloz’s next move as raising rates, and have moved up their forecasts to the middle of next year from the end, according to the median estimate in a Bloomberg survey.

The Bank of Canada surprised markets with a rate cut in January.

Poloz said earlier this week the January cut was already benefiting the economy as the resulting drop in market interest rates and the currency allowed consumers to refinance mortgages at cheaper rates and would bring as much as $20 billion in extra revenue for companies that export to the U.S. this year.

As Poloz has been sounding more optimistic in recent weeks, raising his forecasts for this and next quarter last month, both the currency and the interest rates on benchmark bonds have risen back to where they were before the rate cut. With files from Bloomberg