From Forexlive:
When the Bank of Canada lowered rates to +0.25% during the financial crisis, Governor Mark Carney believed it was the lower bound. As conditions worsened, he turned to forward guidance as a way to push rates lower and stimulate the economy.
Now, the BOC believes that Carney could have cut rates three more times to as low as -0.50%.
The zero-bound was long thought of as a problem for banks but after central banks in Switzerland and Denmark have experimented with negative rates, they’ve proven to work.
Poloz emphasized that they’re only contingencies.
“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,” Governor Poloz said.
Still, the possibility of using the tool is something markets will need to factor in. The Canadian dollar is already at the worst levels since the height of the crisis and this will be another reason to sell.
Negative rates aren’t the only thing in its arsenal, Poloz said.
“In the unlikely event that the economy was hit with another major negative shock, the Bank could implement unconventional monetary policy measures,” he said. “These include forward guidance on the future path of its policy rate, stimulating the economy through large-scale asset purchases (commonly referred to as quantitative easing), funding to ensure that credit is available to key economic sectors, and moving its policy rate below zero to encourage spending.”
Canada is always a good analogue for Australia given its similarities:
- consumer economy
- banking structure
- housing bubble and high household debt
- commodity exposure
So, with the BOC mulling a negative cash rate it rather poses the question could Australia do the same? There are reasons to think not. Canada also has some key differences:
- its metals and energy exports are a little more than one third of exports versus a half for Australia
- it is more exposed to the US economy and less exposed to China than is Australia
- its current account deficit is half that of Australia’s and its economic structure better having run current account surpluses consistently prior to the GFC:
source: tradingeconomics.com
The last point is probably the key. Public debt is much higher in Canada than Australia but there is not much reason for markets to pull the leash on external debt given it is at only $600 billion versus Australia’s astonishing $1.9 trillion.
So, Canada may be able to go into negative interest rates but I suspect that if Australia were to try it we would very quickly find ourselves feeling very much like an emerging market in the heat of crisis.
