Fidelity Says Zero Rate Needed to Revive Oil-Shocked Canada

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Canada’s central bank will eventually join global peers by cutting interest rates to zero to revive flagging output, said Fidelity Investments’ David Wolf.

The world’s 11th-largest economy is hobbled by weak oil prices, indebted consumers and a currency that remains too strong to draw new business investment, Wolf, a former Bank of Canada adviser under Mark Carney, said Monday from Toronto.

Stephen Poloz, Carney’s successor, already cut rates once in January to 0.75 percent as “insurance” against plummeting crude prices. Swaps trading shows investors are betting on just one more rate cut this year. That probably won’t be enough for Canada to avoid becoming mired in weak global demand like other major economies have, Wolf said.

“There’s a reason why rates are zero just about everywhere else in the developed world,” Wolf, who co-manages the C$7.4 billion ($5.9 billion) Canadian Asset Allocation Fund, said in a telephone interview. In Canada, zero rates are “what eventually will happen” as well, he said.

The Bank of Canada makes its next interest-rate decision on April 15.

Carney cut the benchmark overnight lending rate to 0.25 percent in April 2009, saying it was effectively zero, and laid out principles for potential quantitative easing. Canada never joined the U.S., Europe and Japan in using that unconventional policy of asset purchases.

More Cuts

Pacific Investment Management Co. fund manager Ed Devlin also predicts more easing. In a note published today, Devlin said a “more dovish” Bank of Canada focused on signs of weak economic data will lower rates at least once more this year, and maybe twice.

“We think the BOC will take out another 25-basis-point insurance policy later in 2015,” Devlin wrote. “With so many question marks around the path of economic recovery in 2015, a third rate cut is possible later in the year if oil prices continue to decline.”

Given the unprecedented experience global central banks have had with QE since the financial crisis, and with pushing policy rates to zero or even lower, Canada would need to revisit its 2009 guidelines if policy makers decided to pursue extraordinary stimulus, Wolf said.

“No doubt the bank would take a fresh look at what options would be appropriate,” he said.

Canada’s dollar is at “roughly fair value” today, Wolf said, and needs to weaken further before companies are encouraged to make new investments to expand locally.

The currency was little changed at C$1.2479 against its U.S. counterpart at 4:02 p.m. in Toronto, and is down about 6.9 percent this year.

“Just going from overvalued to fair valued historically hasn’t been enough to prompt those changes and I don’t think will be in this case either,” he said.