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Bank of Canada opens door to another rate cut — but not one below zero

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“Going forward, both downside and upside risks to inflation are in play,” he said. “That means being prepared to respond in either direction. Thankfully, we have the tools to do so.”

There’s nothing neutral, however, about the Bank of Canada’s position on negative interest rates.

Until a decade ago, few thought it was even possible to drop borrowing costs below zero. But many European central banks have now done so as part of their desperate struggle to stoke economic growth and boost inflation. The idea is no longer considered crazy.

Still, former Bank of Canada governor Stephen Poloz was never keen, and Macklem endorsed that stance as soon as he took over. Beaudry went out of his way to make sure no one on Bay Street confused a softening of the effective lower bound with renewed interest in a benchmark rate below zero.

“In theory, negative interest rates remain in the bank’s tool kit,” he said. “But we’ve been clear that, barring a dramatically different set of circumstances, we don’t think negative rates would be productive in a Canadian context.”

We don’t think negative rates would be productive in a Canadian context

Paul Beaudry, deputy governor, Bank of Canada

Policy-makers probably won’t have to make that call, at least during this crisis, according to Simon Deeley, a rates strategist at RBC Dominion Securities Inc.

Investment banks such as RBC Dominion have more incentive to take risks than central bankers, who have a lot more riding on mistakes than the size of their Christmas bonuses.

Deeley is already advising his clients to assume the Bank of Canada will adopt a more optimistic outlook next month, which would, in turn, prompt policy-makers to start thinking about tapering the bond purchases at the core of a policy strategy called quantitative easing (QE).

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