BlackRock Says Canada Needs Quantitative Leap to Rescue Economy

Canada’s stagnating economy could force its central bank to deploy the type of extraordinary stimulus adopted in the U.S., Europe and Japan, according to BlackRock Inc., the world’s biggest money manager.

With a commodity prices collapse that probably sent the country into recession in the first half showing no signs of letting up, the Bank of Canada may need to follow its developed-nation peers with quantitative easing, according to Aubrey Basdeo, BlackRock’s head of Canadian fixed-income.

The Bank of Canada has already cut its benchmark interest rate twice this year to turn around the worst economic streak since the country’s last recession. With an overnight rate now at 0.5 percent, it’s nearing the point where other central banks decided to begin bond buying programs to force rates lower still and help companies borrow more cheaply.

“Corporations are screaming, ’I borrow out the curve, I don’t borrow in the overnight market, and my cost of funds have gone up even though you’re lowering rates,’” Basdeo said in an Aug. 10 phone interview from Toronto. “So you have to go into unconventional monetary policy.”

Tool Kit

Bank of Canada Governor Stephen Poloz told reporters July 15 he has “a fair bit of room to maneuver” if more stimulus is needed, citing tools such as quantitative easing, while noting that “forward guidance” would probably be the bank’s first unconventional measure.

Rebecca Ryall, a spokeswoman for the central bank, referred questions on the prospect for quantitative easing to the governor’s comments.

“You look at Canada and you see it’s still struggling because we’ve got a commodity bust,” Basdeo said. “If oil prices continue to crater that certainly is going to be the next move.”

While Basdeo said he agrees with the Bank of Canada’s call for growth to rebound a bit later this year, he looks at the broader global economic landscape, and China in particular, as signs Canada’s resource-focused economy may be in for longer-term stagnation.

The North American benchmark for crude oil, Canada’s largest export, fell Tuesday to its lowest point in six years as China was forced to devalue its currency to boost its flagging economy. The discount Canadian oil producers receive versus U.S. benchmarks reached the most in a year.

Borrowing Outlook

For Basdeo, that shaky economic outlook demands investors charge Canadian companies more to borrow money. Corporate borrowing costs have fallen to near record lows in absolute terms this year, thanks to the central bank’s rate cuts.

But when measured as the premium investors charge to lend to companies rather than the federal government -- an indication of how risky Canada’s firms are perceived to be -- those costs have climbed to the highest since 2012, Bank of America Merrill Lynch data show.

Basdeo said he expects those rates to continue to rise, increasing the odds the Bank of Canada, pinning its hopes for recovery on business investment, will have to cut its overnight rate again, employ forward guidance, and then eventually start buying bonds in order to force long-term corporate rates down.

The Bank of Canada already used forward guidance, signaling in its communications it would be slow to raise its overnight rate, during the previous recession.

Table Talk

While quantitative easing is “technically on the table” if Canada’s economic problems persist, it’s probably the fourth or fifth line of defense, Avery Shenfeld chief economist at Canadian Imperial Bank of Commerce, wrote earlier this month.

Asked at a July 21 news conference whether the Bank of Canada should adopt quantitative easing, Finance Minister Joe Oliver said he didn’t see any need for it in this environment.

For BlackRock’s Basdeo, with forecasts for sluggish global economic growth providing little hope for a recovery in commodity prices, the Bank of Canada may join the Federal Reserve, the Bank of Japan and the European Central Bank in concluding it has little option beyond bond-buying.

“Canada is not indistinct in a way from these other countries,” Basdeo said. “These are not banana republic countries, they are developed market economies that are being confronted with circumstances that requires rates below zero in order to revive their economies.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE