Negative Interest Rates Could Lose Power Over Time, Poloz Says

Negative rates may become less effective at boosting economic growth the longer they’re in place, according to the Bank of Canada.

In comments to the Senate banking committee Wednesday in Ottawa, Governor Stephen Poloz added his voice to the debate about emergency stimulus policies being set in parts of Europe and in Japan.

“Experience in other countries who had more difficult situations than ours showed that negative interest rates can actually function,” Poloz said. However the policy creates “distortions” and it’s not ideal to deploy sub-zero rates for extended periods of time, he said.

“Whatever power they have, they probably lose that power the longer they are there,” the governor said, without providing specific estimates.

In the wake of the 2008 global credit crisis, Canada set its lower bound at 0.25 percent. As the country grappled with the oil-price shock late last year, Poloz said the bank could go as low as negative 0.5 percent if necessary, without disabling the financial system.

Now, with Prime Minister Justin Trudeau’s government introducing deficit spending in a budget last month, Canada is moving to a different policy mix. Poloz has chosen not to cut interest rates this year in part because of that fiscal boost.

The governor also said Wednesday it may take more than three years to realign investment and workers toward non-energy production after the oil shock.

“It may require more patience than we are used to,” Poloz said. “It’s real money at stake, so it’s natural for it to take time,” he said of companies’ investment plans.

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