MNI REVIEW: BOC Surprise Cut Opens Door to QE, Negative Rates

--50bps Cut Friday to 0.75% Is 2nd Since March 4 on Virus, Oil Slump

By Greg Quinn

     OTTAWA (MNI) - The BOC cut interest rates by 50bps for the second time this

month in a surprise move Friday, putting it on the path toward zero by the April

15 meeting and opening the door to negative rates and QE it avoided in the

banking crisis, a former researcher told MNI.

     Governor Stephen Poloz announced the cut to 0.75% around 2 p.m. in Ottawa

during open market trading. He spoke at an unprecedented press conference

alongside Finance Minister Bill Morneau and OSFI's lead banking regulator Jeremy

Rudin, who lowered the cyclical capital buffer lenders had been setting aside. 

     It was a grim Friday the 13th end to the BOC's celebration week of its

doors opening 85 years ago to combat the Great Depression. Poloz said he's

prepared to do more if needed and his toolkit is deep. With several banks

already forecasting another 50bps cut at the next meeting, the BOC will have a

harder choice afterwards and may pick further credit easing tools or QE over

negative rates.

     "You're not that far away" from zero and further action, said Jeremy

Kronick, associate research director at the C.D. Howe Institute and a former BOC

researcher, who sees a 50bp cut by April 15. "We aren't even at a phase like an

Italian-type shutdown."

     Bank of Montreal and Capital Economics also predict a 50bps cut at the

April meeting, and the 0.25% mark in place then would match a record low. Since

the first time the BOC went to 0.25%, policy officials have expressed more

confidence the financial system can handle rates somewhat below zero. 

     The central bank had already announced billions of dollars of market

liquidity Thursday and offered another program Friday. Policy makers will

probably opt to keep going that way rather than cross the threshold of negative

rates, Kronick said. Most officials MNI have spoken to say lower rates are less

effective at easing the global shock to consumer and business confidence and

spending that COVID-19 represents, unlike 2008 when it was a problem with the

plumbing of the banking system.

     "QE is what I'm thinking about," Kronick said. "I would hesitate to go to

negative rates first," he said. "When you go to negative, you are changing the

dynamic."

     BOC stimulus must be followed with fiscal measures targeting suffering

industries and workers, he said, and market calls for a package worth 1% of GDP

sound reasonable. Morneau echoed Prime Minister Justin Trudeau's comments

earlier Friday that a major package is coming in the next few days, even with

Parliament suspended until April 20 to prevent spreading the virus. 

     "We are going to do whatever it takes" to stabilize the economy, Morneau

said, as he announced a CAD10 billion business lending facility.

     Oil price weakness was a main factor worsening Canada's outlook since the

March 4 decision, along with the virus, Poloz said Friday. Canada is a major

exporter of oil and natural gas. "We stand ready to take further action if we

think it's needed, and we have a variety of tools in the toolkit."

     Two of the country's five major banks on Friday said Canada is heading for

a recession, and earlier this week a third said there will be one without a

major fiscal stimulus package. BofA also said Friday Canada was heading into

recession.

     Some of these decisions may come from Poloz's successor after he retires in

early June. Poloz said he's confident the team in place at the central bank is

strong enough for him to retired as scheduled. 

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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