Bank of Canada willing to resort to below-zero interest rate in face of major economic crisis, Poloz says(Financial Post).

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.

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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.

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.

Patrick Abboud

www.capinco.com