Bank Of Canada Still Has Room To Maneuver As BOC’s Poloz Introduces Idea Of Negative Interest RatesBy Kitco News
Tuesday December 08, 2015 14:47
(Kitco News) - The policy divergence between the U.S. and Canada could get even wider as the Bank of Canada has left the door open for potential negative interest rates in 2016, while the Federal Reserve looks to tighten rates starting as early as December.
In a speech at the Empire Club of Canada in Toronto, Canada, Bank of Canada Governor Stephen Poloz said there is the possibility interest rates could fall into negative territory, giving the central bank flexibility to try to promote economic growth.
“In 2009, the Bank said it couldn’t cut its policy rate below 0.25 per cent, because we believed that zero or negative interest rates might be incompatible with some markets, such as money market funds,” he said in his speech. “We now believe that the effective lower bound for Canada’s policy rate is around minus 0.5 per cent, but it could be a little higher or lower. This suggests that we have more room to maneuver in response to adverse shocks than we believed back in 2009.”
Although Poloz said that negative interest rates remain a tool for the Bank of Canada, he also stressed that it is not a guarantee the bank will embark on these policies.
“Our base case sees the Canadian economy returning to full capacity around mid-2017 and the risks to the outlook are roughly balanced. We don’t need unconventional policies now, and we don’t expect to use them. However, it’s prudent to be prepared for every eventuality,” he said.
“The lower Canadian dollar and the interest rate actions taken earlier this year are working and it will be some time before we see their full impact. 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 in his concluding remarks.
Although the Bank of Canada remains optimistic for continued economic growth, Poloz’s optimistic comments come as oil prices dropped to a seven-year low with West Texas Intermediate (WTI) crude oil prices falling to a session low of $36.64 a barrel Tuesday.
There are also fresh concerns over the health of the Canadian labor market as government data showed that 35,700 jobs were lost last month. Consensus forecasts were calling for a loss of 9,700 jobs.
Some of the other tools available to the Bank of Canada include forward guidance, which impact market expectations; however, Poloz warned that to be effective, the bank needs to have credibility, which means following through with its commitments.
Another tool the bank highlighted is large-scale asset-backed purchases, something that the Bank of Canada talked about in 2009 but never had to use. Finally, the last unconventional tool for the central bank is funding for credit.
“The idea is to make sure that economically important sectors continue to have access to funding even when the supply of credit is impaired. In this case, the central bank would provide collateralized funding at a subsidized rate as long as banks met specified lending objectives,” he said.
Poloz’s comments about possible negative interest rates also come less than a week after the European Central Bank cut its deposit rate by 10 basis points, bringing it down to negative 0.30% from 0.20%.
Poloz added that the Bank of Canada is also monitoring Switzerland’s monetary policy, which includes a negative rate of 0.75%.