Poloz on Negative Rates: They Taste Bad But Will Work in a Pinch

  • Monetary policy becomes less effective as rates move to zero
  • Low borrowing costs are still helping offset severe headwinds

Bank of Canada Governor Stephen Poloz said negative interest rates may have minimal impact on growth and are even disliked by policy makers pressed into using them, however they’re still an option if the economy needs a jolt.

“It’s not saying it’s some magic bullet, and no one likes the idea, but if the job isn’t done, and you are basically the only entity that is trying to make it happen, you have to use every tool in your toolbox regardless of how ineffective ultimately they may be,” Poloz said Tuesday after a speech in New York. “Experience is showing that we are having effects out there. They aren’t large ones.”

Japan and parts of Europe, suffering for years from stagnant prices and tepid output, have imposed negative rates in an effort to spur growth. In a December speech, Poloz said negative rates were among the tools the central bank could use to keep inflation at the 2 percent target, but said Canada was “quite far” from needing that type extraordinary stimulus, a point he reiterated Tuesday, saying a return to an easing bias would require a significant new shock or series of shocks.

Poloz said Canada’s policy rate could be brought to as low as negative 0.5 percent -- from the current 0.5 percent -- and said it’s difficult to estimate the impact negative rates would have on the economy. That’s because there’s limited historical experience with the policy, he said, and also recent experiments with negative rates coincided with a drop in oil prices that also boosted consumer spending.

His speech to investment professionals focused on how countries would benefit from expanding free trade deals like the Trans Pacific Partnership. He said the idea that monetary policy has become ineffective is a “myth.”

Low interest rates prevented a second Great Recession and are still helping economies deal with “severe” headwinds of a lower growth environment, Poloz said. The need for low-for-long interest rates also means pension fund investors must get used to finding new ways to generate returns, he said.

“That’s the kind situation many of us find ourselves in, with excess capacity, and with monetary policy really not able to give much more impact,” Poloz said in response to a question from the audience. Fiscal expansion, he said, can instead provide its maximum benefit because demand increases without driving up interest rates.

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