BoC Cuts Policy Rates Another 50bp; Prime Follows

The Bank of Canada has announced:

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¼ percent. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent. This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic.

The spread of COVID-19 is having serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices. The pandemic-driven contraction has prompted decisive fiscal policy action in Canada to support individuals and businesses and to minimize any permanent damage to the structure of the economy.

The Bank is playing an important complementary role in this effort. Its interest rate setting cushions the impact of the shocks by easing the cost of borrowing. Its efforts to maintain the functioning of the financial system are helping keep credit available to people and companies. The intent of our decision today is to support the financial system in its central role of providing credit in the economy, and to lay the foundation for the economy’s return to normalcy.

The Bank’s efforts have been primarily focused on ensuring the availability of credit by providing liquidity to help markets continue to function. To promote credit availability, the Bank has expanded its various term repo facilities. To preserve market function, the Bank is conducting Government of Canada bond buybacks and switches, purchases of Canada Mortgage Bonds and banker’s acceptances, and purchases of provincial money market instruments. All these additional measures have been detailed on the Bank’s website and will be extended or augmented as needed.

Today, the Bank is launching two new programs.

First, the Commercial Paper Purchase Program (CPPP) will help to alleviate strains in short-term funding markets and thereby preserve a key source of funding for businesses. Details of the program will be available on the Bank’s web site.

Second, to address strains in the Government of Canada debt market and to enhance the effectiveness of all other actions taken so far, the Bank will begin acquiring Government of Canada securities in the secondary market. Purchases will begin with a minimum of $5 billion per week, across the yield curve. The program will be adjusted as conditions warrant, but will continue until the economic recovery is well underway. The Bank’s balance sheet will expand as a result of these purchases.

The Bank is closely monitoring economic and financial conditions, in coordination with other G7 central banks and fiscal authorities, and will update its outlook in mid-April. As the situation evolves, Governing Council stands ready to take further action as required to support the Canadian economy and financial system and to keep inflation on target.

Changes to prime have not been announced yet, but watch this space!

The Big Banks have followed with their prime rates – at least, according to the two announcements made public as of initial publication of this post. Sadly, we do not know what has been done with the banks’ top secret internal primes or the spreads to Prime that the average customer might see on his renewal notice.

Details are:

TD did not issue a press release, but did put out some puffery:

More help is here. Bank of Canada Governor Stephen Poloz and his team have been proactive and creative in their response to the pandemic, and today’s announcement continues this trend. The Bank of Canada not only sliced its policy rate back to 0.25%, but also delivered two new asset purchases programs, including quantitative easing ‘proper’, specifying that its purchases of Government of Canada securities will result in a larger balance sheet. These are welcome developments that, together with the string of liquidity and other measures of recent weeks, provide a solid backstop to the Canadian financial system. These actions should also reinforce the transmission of monetary policy, providing a fair bit of gas to the economic recovery when the pandemic is finally behind us.

Getting from here to there will not be easy, and so we should not be surprised to see further announcements in the coming weeks as markets digest the implications of the economic sudden stop (see our recent forecast update for our current estimates of the implications on growth and labour markets).

Looking ahead, in a break from past research and communications that had put negative interest rates on the table, Governor Poloz and his team have now seemingly ruled any further cuts out, referring to 0.25% as the effective lower bound. This had been hinted at by the Governor in recent weeks – and in the press conference following this morning’s rate decision the Governor noted that negative rates are still in the toolkit, but experiences in other countries have seen challenges to the financial system result from these policies.

Thus, while they’re not completely ruled out, the Governor’s view is that negative rates are “not sensible” at this stage. Clearly then, any further easing will take the form of increased purchases of government securities, and/or adjustments to other purchase programs to ensure that monetary stimulus is being transmitted fully to all corners of the financial system.

David Parkinson reports in the Globe:

With the Canadian government moving forward on a $52-billion emergency aid program, and with the Bank of Canada having already taken numerous steps in the past two weeks to address market liquidity, the bank decided the time was right to open its policy taps.

“A firefighter has never been criticized for using too much water,” Bank of Canada Governor Stephen Poloz said in a conference call with reporters on Friday.

However, Mr. Poloz made it clear that the bank has no intention of cutting its rate further, and rejected the idea of negative interest rates similar to those at the European Central Bank.

“At this stage, it would be not sensible to think of interest rates going lower than this. We consider this to be the effective lower bound,” Mr. Poloz said.

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