There is a new debate brewing in Canadian economic circles following last week\’s rate of interest cut: will the Bank of Canada need to start considering bringing out the monetary bazooka?
The debate about unconventional policy measures, which include quantitative easing – the very same tool the U.S. Federal Reserve deployed within the years after the financial crisis -?is heating up after Governor Stephen Poloz and the team brought Canada\’s benchmark interest rate closer to zero last week, with a 25 basis point cut to 0.50 per cent.
How the Bank of Canada\’s rate cut might have added $100,000 to your pension in a single day
Early reactions towards the global oil price war were that business as always would return before too much time to Alberta\’s oilsands. 6 months later it’s not looking that way any longer. Read on
The cut is made as?a number of?data released this month is constantly on the suggest that the Canadian economy likely applied for a recession within the first 1 / 2 of the year.
“The rapidly emerging debate addresses the issue of whether the Bank of Canada stands willing to step into the arena of unconventional policies, in case the evolution continues to stubbornly track the downside scenario and never the baseline,” said Jimmy Jean, senior economist at Desjardins Capital Markets.
Recent economic indicators show a Canadian economy that is constantly on the struggle in the wake of the collapse in oil prices that began this past year. Statistics Canada said Monday that wholesale sales for the month of May declined one percent, compared with economist expectations that sales could be flat. That follows a disappointing manufacturing read last week, which demonstrated that factory sales edged up only 0.1 percent in May, compared with expectations of the 0.4 percent rise.
Unconventional monetary policy has been deployed through the world\’s major central banks to leap start their economies previously few years, including quantitative easing programs by the European Central Bank, the financial institution of Japan and the U.S. Federal Reserve – the latter of which deployed three separate QE programs, buying trillions of dollars price of U.S. Treasuries to push down long-term yields.
But while quantitative easing is the first thing that one thinks of when discussing unconventional policy, there are a number of monetary tools the BoC can deploy if?it\’s forced to use its last remaining lifeline and cut its rate to zero.
For instance, the bank could bring back forward guidance, that was introduced by former governor Mark Carney in \’09 and soon after adopted by other banks worldwide. Forward guidance involves communicating clearly to markets the conditions the bank sees as necessary for future rate hikes, as well as potentially hinting in the timing of these hikes. Poloz chose to end explicit guidance in 2014 as he took over from his predecessor, saying it ought to be reserved for use in a “zero lower bound” environment.