Video - February 2016 Canadian Monetary Policy
In this webcast on Canadian monetary policy, our experts Michel Doucet and Jean-René Ouellet from Desjardins Securities Portfolio Advisory Group talk about the tools the Bank of Canada has to help the economy, including adjusting key interest rates and the possible introduction of quantitative easing.
SUBJECT : Canadian Monetary Policy
EXPERTS : Michel Doucet and Jean-René Ouellet
Note: The information in brackets "[...]" describes the visual and audio content of the video other than the dialogue or the narration.
[Elegant music begins. The firm's logo appears on screen, as well as the video’s title: Market Trends – February 2016 - Canadian Economy. These images give way to Mr. Michel Doucet and Mr. Jean-René Ouellet sitting in a newsroom like set, in front of a screen on which the following is written: ‘’Market Trends’’].
Michel Doucet (B. Sc., CIM®, Vice-President and Portfolio Manager, Portfolio Advisory Group)
Hello and welcome to Market Trends.
Michel Doucet along with Jean-René Ouellet. Today, we'll talk about Canada’s monetary policy.
Jean-René Ouellet (MBA, CFA, Portfolio Manager, Portfolio Advisory Group)
In our segment on the Canadian economy, our analysis of the economic backdrop indicated that the engines of growth were showing signs of wear. You also concluded that the Bank of Canada could help out. Am I right?
You're reading my mind! In fact, the Bank of Canada has been in intervention mode since January 2015. Twice last year, it lowered its key rate by 25 basis points. The key rate is now at 0.50%.
But the question is: Can it do more?
Surely it can! If the Canadian economy needs additional support, the Bank of Canada has a conventional monetary tool kit and an unconventional one.
By conventional, you mean it can lower its key interest rate again?
If appropriate, the Bank of Canada could indeed lower interest rates to 0%.
Could it follow the path taken by the United States, Switzerland, Japan and the euro zone if the economy doesn't respond adequately?
The Bank of Canada also has an unconventional monetary arsenal. It could, for example, give forward guidance to the economic and financial players.
A large-scale asset buying program, often referred to as quantitative easing, could also be announced. The goal being to lower interest rates along the entire yield curve and to anchor borrowing rates for individuals and businesses.
The Bank of Canada could also announce a funding for credit program. The idea is to make sure that economically important sectors continue to have access to funding even when the supply of credit is impaired. In this case, the Bank would provide collateralized funding at a subsidized rate as long as banks meet specified lending objectives.
Lastly, it could lower its key rate into negative territory. In 2009, the Bank said it couldn’t cut its policy rate below 0.25 per cent, because it believed at the time that zero or negative interest rates might be incompatible with some markets, such as money market funds. This was a common view at the time.
Since then, we have seen the experience of several central banks, such as the ECB and the Bank of Japan, the Swiss National Bank, which have all adopted negative policy rates. There, we’ve seen that financial markets have been able to adapt and continue to function. Given these developments, the governor of the Bank of Canada has said twice since December 8, 2015 that it is confident that Canadian financial markets could also function in a negative interest rate environment.
What probability do you give to this latter scenario?
15 to 20% for now.
My baseline scenario sees another cut in the key rate. Investors will then be calling for a quantitative easing program. A broad-based decline in interest rates and a drop in the Canadian dollar will then follow. I give this scenario a 45 to 50% chance.
And the Canadian dollar in all this?
Another day, another time.
Over what time horizon do you see your baseline scenario unfolding?
Six to twelve months! One thing's for sure, analyzing the economic and financial backdrop has never been so exciting for economists and investors alike.
Be sure to join us for the next Market Trends webcast.
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