Bank of Canada breaks from the pack

May 20, 2009

20 May 2009

 

Bank of Canada breaks from the pack

 

This article is excerpted from the 20 May 2009 edition of “globeandmail.com”.

 

Bank of Canada Governor Mark Carney's options were quickly running out.

 

The economy was still in deep decline, interest rates were already at their lowest ever and he couldn't take them much lower without bumping up against zero.

 

Like many central bankers these days, he turned to unconventional means. But instead of fully embracing the controversial printing-money approaches of the United States and the European Union, the Bank of Canada took a different tack.

 

In April, the bank joined a small club of countries in laying out very clearly where it plans to take its key interest rate over the coming quarters. Mr. Carney said he will keep it right where it is - at 0.25 per cent - for more than year, as long as nothing major develops.

 

The plan: By publishing its previously secret plans for interest rates, the Bank of Canada is using time and near-promises to bolster confidence, anchor inflation expectations and calm volatile credit markets.

 

On the surface, the tool seems far more benign that the intrusive and unproven quantitative easing approaches of central banks in other countries.

 

But it's not a risk-free venture. If the public digests the central bank's message as a firm promise, a change in direction from the bank could provoke the very volatility it aims to mollify.

 

And the long-term commitment to rock-bottom rates may do little for confidence and growth if it's seen as an impotent weapon against a vicious global recession, recent research suggests.

 

The interest rate commitments that Canada has embraced - along with Norway, Sweden and New Zealand - may not do much to help the central bank in keeping the economy on an even keel. And at worst, they could backfire if markets ignore the strings attached.

 

"The difficulty is the problem understanding conditionality," said Chuck Freedman, a former deputy governor at the Bank of Canada who is analyzing the issue for the International Monetary Fund. "It would take time for the financial markets to adjust. And you have to have a lot of training to understand the conditionality."


Topic(s): 
Canadian Economy & Politics
Information Source: 
Canadian News Channel
Document Type: 
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