Sub-zero policy rate an option in unlikely event of another crisis: Stephen Poloz

The Bank of Canada is saying for the first time that it would consider pushing its trend-setting interest rate below zero if the country ever suffered another major economic shock such as the financial crisis.

OTTAWA — The Bank of Canada is saying for the first time that it would consider pushing its trend-setting interest rate below zero if the country ever suffered another major economic shock such as the financial crisis.

In prepared remarks of a speech Tuesday, governor Stephen Poloz said the option of a negative key interest rate was now among several potential unconventional monetary policy tools the bank could apply in an unlikely crisis scenario.

The central bank, he said, has moved its “effective lower bound” — or its floor — for the benchmark rate into sub-zero territory for the first time, dropping it to negative 0.5 per cent from the positive 0.25-per-cent mark it set in 2009. The bank’s rate is now 0.5 per cent.

There could be limitations on the impact of such a move, Poloz said.

“While we now believe that interest rates can be pushed below zero, there still is a lower bound,” Poloz said in the speech at the Empire Club of Canada in Toronto.

“So we can’t be cavalier about how much more room to manoeuvre we have. Further, there is evidence that consumers and businesses respond less to interest-rate declines when interest rates are already very low.”

Poloz, however, stressed that the fact he listed new unconventional monetary measures should in no way be taken as a sign the bank is about to use any of them.

He reiterated his optimism for the Canadian economy and reaffirmed his projection it was strengthening despite the pain of persistently low resource prices. The non-resource sectors, Poloz added, have continued to strengthen.

“Given this outlook, it may seem like an odd time to be updating our unconventional monetary policy tool kit,” he said.

“I certainly hope we won’t ever have to use these tools. However, in an uncertain world, a central bank has to be prepared for all eventualities.”

Poloz said after examining the experiences of other countries since the financial crisis, the bank added new potential remedies to a cabinet already stocked with options like forward guidance and large-scale asset purchases, also known as quantitative easing.

The bank used a form of forward guidance in 2009 when it committed to keep the key rate unchanged for a year as long as there was no change in the inflation outlook.

On Tuesday, Poloz announced another new unconventional measure added to the bank’s arsenal: funding for credit.

The option would ensure economically important sectors had continued access to funding even when the credit supply was impaired, Poloz said.

Poloz also said fiscal stimulus tends to be a more powerful tool than monetary policy in extreme crises.

Just Posted

Fast-expanding seafood giant joins Irvings, McCains as N.B. business royalty

FREDERICTON — For the Irvings, it was Bouctouche. For the McCains, Florenceville.… Continue reading

Washington state combats collisions with new wildlife bridge

SNOQUALMIE PASS, Wash. — Before descending the Cascade Mountains on its final… Continue reading

China says it has no information on detained ex-Canadian diplomat

BEIJING — China’s Foreign Ministry said Wednesday that it had no information… Continue reading

Online sales, interactive displays as lottery agencies vie for customers

WINNIPEG — Like many millennials, Sarah Rogalsky doesn’t go out of her… Continue reading

‘Part of the solution:’ Alberta seeks proposals to build new refinery

EDMONTON — Alberta is looking for someone to build a new oil… Continue reading

Online ads spoil Christmas surprises, raising privacy concerns: experts

Lisa Clyburn knew she had found the perfect gift for her nine-year-old… Continue reading

Sebastian Giovinco, Jonathan Osorio and Adriana Leon up for top CONCACAF awards

Toronto FC’s Sebastian Giovinco and Jonathan Osorio are up for CONCACAF male… Continue reading

Huitema, Cornelius named 2018 Canadian Youth International Players of the Year

TORONTO — Canada Soccer has named striker Jordyn Huitema and defender Derek… Continue reading

Review: Too much Spider-Man? Not in the Spider-Verse

You might be forgiven for feeling superhero overload this holiday season. Had… Continue reading

‘Modern Family’s’ Sarah Hyland had second kidney transplant

LOS ANGELES — “Modern Family” star Sarah Hyland says she had a… Continue reading

Orlando SC acquires Canadian Tesho Akindele in trade with FC Dallas for cash

ORLANDO, Fla. — Canadian forward Tesho Akindele was traded to Orlando City… Continue reading

Koskinen notches third shutout, McDavid gets winner as Oilers blank Flames 1-0

EDMONTON — The Edmonton Oilers appear to have shored up their defence… Continue reading

Most Read