Rates can fall to -0.5 percent, but no need now: Bank of Canada

TORONTO (Reuters) - The Bank of Canada estimated on Tuesday it could, if needed, set its benchmark interest rate as low as minus 0.5 percent, but stressed that the economy was recovering as expected and the bank did not expect to use such unconventional monetary policy.

Bank of Canada Governor Stephen Poloz takes part in a news conference upon the release of the Monetary Policy Report in Ottawa, Canada October 21, 2015. REUTERS/Chris Wattie

Governor Stephen Poloz laid out what he called an updated toolkit of unconventional monetary policy, one which showed the central bank had more room to maneuver than in 2009, when it estimated it could not cut rates lower than 0.25 percent.

Poloz said he recognized it might seem an odd time to speak about unconventional monetary policy given that the economy was rebounding from cheap oil and commodities in a way laid out in the central bank’s October Monetary Policy Report.

“Today’s remarks should in no way be taken as a sign that we are planning to embark on these policies,” Poloz said in a speech. “To reiterate, our base case sees the Canadian economy returning to full capacity around mid-2017 and the risks to the outlook are roughly balanced.

“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.”

The bank has been researching unconventional policy, laying out various papers in recent months and publishing new material on Tuesday simultaneously with Poloz’s speech.

The experiences of the European Central Bank and other central banks with negative rates have shown it was possible to use them and for financial markets still to function, he said.

It means that the Bank of Canada has about 100 basis points of maneuver beneath its current 0.5 percent overnight interest rate, Poloz told reporters after the speech.

But he emphasized that all the ingredients of a recovery were in place, even if masked somewhat by the decline in the energy and resource sectors, and Poloz said he was quite encouraged by the economic picture.

“Underneath the surface, we have all those things happening and the effects of our policy stimulus are still only probably half there. It will take another year for all those effects to come true,” he said.

While acknowledging some negative data points, Poloz said one must not lose sight of positives. U.S. strength, the two Canadian rate cuts this year and the lower Canadian dollar were all helping the economy adjust, he said.

Writing by Randall Palmer and Leah Schnurr; Editing by Meredith Mazzilli and Leslie Adler