Central bank could go below 0%
Central bank modifies policy ‘tool kit’ to prepare for every possibility
TORONTO The Bank of Canada would be willing to cut its benchmark interest rate to below zero per cent if the country is faced with a major economic shock, says Stephen Poloz, governor of the Bank of Canada.
In a speech to the Empire Club of Canada in Toronto, Poloz described the use of negative interest rates as one of four “unconventional monetary policy measures” it would be willing to deploy if faced with a major economic crisis. Yet he said the bank is unlikely to use such measures as it expects the Canadian economy to grow in 2016 and reach full capacity in mid-2017.
“We don’t need unconventional policies now, and we don’t expect to use them,” Poloz said. “However, it’s prudent to be prepared for every eventuality.”
The bank’s new willingness to consider sub-zero interest rates modifies the “tool kit” of policy responses the bank has at its disposal in the event of an economic crisis. The other policies are providing guidance on the future path of its benchmark interest rate policy, stimulating the economy through quantitive easing and providing credit to key economic sectors.
The bank’s trendsetting rate is currently 0.5 per cent, and Poloz said that if the bank implemented negative rates, it would not go below -0.5 per cent. He said it would take an event similar to the global financial meltdown of 2008-09 before the bank would consider such a move.
“What we’re saying today is that we now believe that we have roughly a hundred basis points’ worth of room to manoeuvre underneath our current interest setting,” Poloz told reporters after his speech.
Although Poloz said the bank has no immediate intention to use unconventional measures, the bank announced on Tuesday that it would update its “tool kit” of policies that it would use in response to an economic crisis.
The bank’s new willingness to adopt a lower policy rate of zero per cent or even -0.5 per cent is notable because back in 2009, the Bank of Canada said it would never cut its policy rate below 0.25 per cent.
Negative interest rates have been tried by other banks, among them the European Central Bank and the Swiss National Bank, whose rate is currently -0.75 per cent. The Bank of Canada has studied the use of those tools in those markets and found that markets were able to adapt.
Poloz said that the Canadian economy is going through a “complex and lengthy adjustment” to a drop in resource prices, and said that this adjustment will last a couple of years. He said the nonresource economy continues to gather steam, driven by exports. The bank therefore expects the Canadian economy will result in inflation climbing toward a sustainable level of two per cent by mid-2017.