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Bank of Canada to cut key rate to zero in 2016, Barclays says

Bank of Canada Governor Stephen Poloz takes part in an interview with Reuters in Ottawa on Dec. 18, 2015.

CHRIS WATTIE/REUTERS

The Bank of Canada will cut its key interest rate to at least zero this year and could move toward negative rates to offset the crude oil price slump, according to Barclays PLC.

The London-based bank expects the Bank of Canada to cut its overnight target rate 25-basis points to 0.25 per cent at its announcement on Wednesday, and a total of at least 50 basis points in 2016, Juan Prada and Andres Jaime Martinez wrote in a research note.

"In our view, risks are tilted toward further easing, which would imply negative rates," the strategists said. "The experience of countries like Switzerland, Sweden, Denmark and the euro area has taught central banks that zero is not the lower bound."

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Persistent weakness in the price of crude oil, softer than expected economic data and concerns about the Chinese economy are weighing on the Canadian economy, the strategists wrote. Western Canadian Select, an Alberta oil-sands benchmark, has declined by half since the central bank's October policy update while the Canadian dollar has depreciated by about 10 per cent.

The Bank of Canada last cut interest rates in July to 0.5 per cent. Swaps traders are currently pricing in a 56-per-cent chance that the central bank will cut interest rates this week. In his October update, bank Governor Stephen Poloz said the effective lower bound for Canada was about minus 0.5 per cent, raising the possibility of negative interest rates.

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