Reports overnight suggested the Bank of Canada could potentially drop the benchmark interest rate below its current setting of 0.25%, while emphasizing that it remains deeply skeptical of negative interest rates.
That might not sound like a big deal, but it’s been a point of contention in some Bloomberg chat boxes on Bay Street since Governor Tiff Macklem raised the possibility of a lower policy rate during parliamentary testimony last month.
The central bank still sees 0.25% as the "effective lower bound" for interest rates. Central bankers reckon that anything lower would likely cause more problems in financial markets than could be justified by the stimulus that would result from a lower setting.
But Macklem and his deputies have opted to give themselves some wiggle room, probably because other central banks, including the Reserve Bank of Australia, have recently tested what they thought were their interest-rate floors without causing any obvious harm.
For sure, the Bank of Canada isn’t predicting economic conditions will get worse. Policymakers this week indicated they were open to rethinking things by emphasizing that their current judgement is based on how the world looked in October, when Canada was on the verge of a second wave of COVID-19 infections and restrictions. By January, when the central bank next updates its outlook, a vaccination program could be in full swing.
