“The fact that the Bank of Canada has kept the door open to it (a rate cut) in recent months hasn’t gone unnoticed by markets,” said Andrew Kelvin, chief Canada strategist at TD Securities.
“People have their guard up” even though it’s not clear more stimulus is needed, Kelvin added.
Reflecting rate cut risk, Canada’s three-month overnight index swap rate has moved below the 0.2 per cent level where the overnight rate has been settling. It has eased 4 basis points since November to trade at about 0.17 per cent.
A BoC spokeswoman declined to comment, citing a blackout period ahead of next week’s rate decision.
Other central banks have moved in small increments. In November, the Reserve Bank of Australia cut its policy rate by 15 basis points to 0.1 per cent, while the Bank of England did the same last March.
“If you think that 25 basis points is not the effective lower bound, then why wouldn’t you be moving rates to the effective lower bound, since we have ongoing quantitative easing and we are still buying provincial bonds,” Kelvin said.
A rate cut could add stimulus by reinforcing already low borrowing costs and checking further gains for the Canadian dollar.
Adjusting the asset-purchase program and setting yield-curve targets are other easing options the BoC has flagged, seeing risk of economic scarring if the recovery takes too long.
Economic activity is expected to pick up once lockdowns end and vaccinations become more widespread, but analysts say the potential for another rate cut should not be ignored.
“The Bank of Canada just mentioning it in prepared remarks means that they’re thinking about it,” said Royce Mendes, a senior economist at CIBC Capital Markets.
