Bank of Canada willing to consider below-zero interest rate
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Bank of Canada willing to resort to below-zero interest rate in face of major economic crisis, Poloz says
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 “toolkit” 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 quantitative easing and providing credit to key economic sectors.
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The bank’s trend-setting 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. “But we also have the opportunity to do these other unconventional things. All these things would be on the table in the face of a significant shock.”
Although Poloz said the bank has no immediate intention to use unconventional measures, the bank announced on Tuesday that it would update its “toolkit” of policies that it would use in response to an economic crisis.
“I certainly hope we won’t ever have to use these tools,” he said. “Should the need arise, we’ll be ready.”
If it did feel that it was necessary to introduce one of these measures, the bank wouldn’t roll them out in any particular order, Poloz said. It would use whatever combination it judged appropriate in the circumstances.
The bank’s new willingness to adopt a policy rate of zero per cent or even -0.5 per cent is notable because back in 2009, the bank 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.
“The bank is now confident that Canadian financial markets could also function in a negative interest rate environment,” Poloz said.
That said, the bank says that it would not follow Switzerland’s lead and consider a move beyond -0.5 per cent.
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. At the same time, he said the non-resource 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.
“The Bank will keep its primary focus on achieving the inflation target,” Poloz said.
“The overall economy is growing again, even as the resource sector contends with lower prices, because the non-resource sectors of the economy are gathering momentum. This is all taking longer than we imagined back in 2008, but our judgment is that our economy can get back to full capacity with inflation sustainably on target around mid-2017,” he said.
Bank of Canada willing to resort to below-zero interest rate in face of major economic crisis, Poloz says