Canada may slash key rate to negative on collapsing oil prices

The remains of a snowman is pictured on the front lawn of Parliament Hill in Ottawa. © Chris Wattie
The Bank of Canada may cut its key interest rate this year to zero and possibly go negative to compensate for falling crude prices, according Barclays analysts quoted by Bloomberg.

The Bank of Canada is expected to cut its overnight target rate 25 basis points to 0.25 percent on Wednesday and to zero during 2016.

“Risks are tilted toward further easing, which would imply negative rates. The experience of countries like Switzerland, Sweden, Denmark and the euro area has taught central banks that zero is not the lower bound,” the experts said.

The last cut in interest rates to 0.5 percent took place in June. Falling oil prices, a slowing Chinese economy and weak domestic economic data were the main reasons.

In October, Central Bank governor Stephen Poloz said the effective lower boundary for Canada was about minus 0.5 percent, raising the possibility of negative interest rates.

"The odds of hitting the lower bound have obviously gone down if now you can go to minus 0.5 percent," he told Reuters.

The collapse in oil prices has sent the Canadian dollar to its lowest level against the US dollar in twelve years.