Canada has tools beyond zero rates if needed, Poloz says

Canada has tools beyond zero rates if needed, Poloz says

Canada has tools beyond zero rates if needed, Poloz says
The biggest change is the central bank’s new confidence, based on experiences other countries, it could bring the benchmark interest rate to below zero by charging commercial banks on their deposits. The so-called effective lower bound is the lowest interest rate the central bank could impose and still have financial markets function effectively.

“We now believe that the effective lower bound for Canada’s policy rate is around minus 0.5 percent, but it could be a little higher or lower,” Poloz said. “This suggests that we have more room to maneuver in response to adverse shocks than we believed back in 2009.”
 
More Comfort

It’s a conclusion that will inform the bank as it considers renewal next year of its five-year mandate, which currently includes an inflation target of 2 percent.

Because potential growth rates are lower since the global crisis, targeting 2 percent inflation means it’s more likely that policy interest rates will fall to zero than in the past. The findings that the central bank’s rates could be negative though may give policy makers more comfort, Poloz said.

“If interest rates can go below zero, you get a bit of room to maneuver on the other side,” Poloz said after the speech in response to a question from the audience.

The speech also marked an endorsement of fiscal stimulus spending during a crisis, at a time when a new Liberal government has come to power promising to ramp up deficits. It is the first by Poloz since the Oct. 19 election that brought Prime Minister Justin Trudeau to power.

“It may sound ironic, but the circumstances under which it may be appropriate to consider unconventional monetary policies are also those under which fiscal policy tends to be most effective,” Poloz said.

2009 Lessons

Other lessons from 2009 are that asset purchases is a tool that “can be effective in extending the central bank’s impact well out on the yield curve.” Forward guidance is a tool that “many have used to good effect,” while policy makers can also target economically important sectors specifically with a tool called “funding for credit,” Poloz said.

Another lesson: there is no pre-determined order in using unconventional policy.

“The effectiveness of each tool will depend on the situation, making it more a matter of choosing the right one at the right time,” Poloz said.

Even with all these tools available, there are still limits, Poloz said.

“Fundamentally, economists have long been aware that the effectiveness of monetary policy has its limits once interest rates reach very low levels,” Poloz said.

There are also clear signs none of this will be necessary, he said. The central bank still forecasts the economy will continue to pick up speed in 2016 and 2017, with a projected return to capacity “around mid-2017.”

“In a world where many economies continue to resort to unconventional monetary policies, Canada’s outlook is encouraging,” 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.”

 

read more > 1 2