Economists: $100bn stimulus package required, not rate cuts

A panel of leading experts believe the BoC will hold interest rates next week

Economists: $100bn stimulus package required, not rate cuts
Steve Randall

Help for consumers, help for businesses, help for key industries, but will it be enough?

As Canada – along with the rest of the world – continues to grapple with the potential negative impact of the coronavirus pandemic, a panel of experts believe that there will need to be more action to protect from the worst economic fallout.

The panel of 12 economists and other money experts convened by comparison site shows that there is zero expectation of the Bank of Canada cutting interest rates again when it meets next week.

With the overnight rate at 0.25%, a further cut would cut the cost of existing borrowing, but most of the panel believe that new borrowing will be constrained by consumer and business concerns of the economy’s direction of travel, limiting the impact of a cut.

And the experience of those countries that have cut rates to zero or below has not proven the concept.

“The inconclusive experience of Sweden with a negative policy rate, in respect to the weak pass-through to lending and deposit rates, is likely to prevent the BoC to go down that route,” said Sebastien Lavoie, chief economist at Laurentian Bank Securities.

However, Concordia University professor of economics, Moshe Lander, believes that a further rate cut is warranted.

“If the Bank wants to challenge its theory that 0.25% is the effective lower bound, it can take an unconventional move to lower the target overnight rate by, say, 10 basis points, rather than the usual 25 basis points and see how markets react,” he said.

When will a cut happen?
The panel was unanimous in dismissing the likelihood of a rate cut next week but asked about future rate moves, it was less united on whether a cut to zero should occur later: 58% said yes, 33% no, 8% unsure.

“As interest rates approach zero, further rate cuts have a less stimulative impact...when weighing the small stimulative benefit against the feasible large cost to the financial sector, there is not a strong case for further cuts to the overnight rate at this point,” said Alicia MacDonald, associate director of economic forecasting for the Conference Board of Canada.

But Brian DePratto, senior economist at TD Bank, says that negative rates should remain as an option.

“The evidence of the effectiveness of negative rates is mixed, so it is logical that other tools be 'taken off the shelf' before moving into negative territory. But they are clearly still part of the toolkit - and in the event that things get much worse, no tool should be ruled out entirely,” he said.

$100 billion extra stimulus
With the majority of the panel against further rate cuts, what are the options for shoring up Canada’s economy in the months ahead?

The average that the panel believe the BoC will spend on purchasing government bonds is $183 billion but some believe it could be as much as $500 billion.

Economics Professor at the University of Toronto, Angelino Melino, says the program is a valid response.

“Normally, the bank would cut its policy rate by 500 basis points in response to the current crisis. It can't do that this time,” he said. “Financing the increased government spending amounts to a real world ‘helicopter drop’, which is an appropriate tool for the Bank of Canada to use at this time.”

But the panel believes there will need to be far more stimulus for the economy.

Of the nine members of the panel to comment, 90% said an additional stimulus package would be required with most saying that around $100 billion was needed.

The support they would like to see include further help for businesses through targeted industry measures, perhaps through a GST remittances break and a GST rate of zero to aid cash flow.

Other measures may include basic income for households and extra help for low to medium income households, credit support for businesses, and employment assistance for young people.

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