Bank of Canada cuts rates third time in a month to stem “pandemic-driven contraction”By: Lisa Coxon on March 27, 2020
For the third time this month, the Bank of Canada has lowered the overnight interest rate by 50 basis points, as the country woke up on Friday to a second emergency rate cut in an attempt to stave off the economy’s “pandemic-driven contraction.”
The overnight interest rate is now 0.25%, a low we haven’t seen since the 2009 financial crisis.
“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 bank said in its release.
In a note sent shortly after the announcement, CIBC’s Royce Mendes said that this was a “move we've been expecting.”
Easing the costs of borrowing
“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 bank continued in its release. “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.”
An abrupt decline in world oil prices, indeed. Toronto motorists, for instance, have been enjoying wildly low gas prices in the city as of late, around 65 cents a litre — something they surely haven’t seen in more than a decade.
The bank made clear in its release this morning that it believes this cut “cushions the impact of the [economic] shocks by easing the cost of borrowing.”
This move is intended to help both businesses and people. With mass layoffs sweeping across the country as a direct result of businesses shuttering due to the new coronavirus, many Canadians will need to rely on credit to get themselves through, despite economic aid from the government and deferred mortgage payment programs by the big banks.
Lower borrowing costs is a helpful tool, but financial experts have expressed caution that this could result in Canadians taking on more debt than they can handle.
Bank launches two new programs
In addition to the rate announcement, the bank unveiled the launch of two new programs: the Commercial Paper Purchase Program (CPPP), which is intended to “help to alleviate strains in short-term funding markets and thereby preserve a key source of funding for businesses.”
The second is intended to help ease the strain in the Government of Canada debt market, and involves the bank buying government 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.”
Is there an end in sight?
This month was incredibly unusual. We saw three interest rate moves from the bank — and they were all cuts. Can we expect more?
“... the Bank noted that this was the effective lower bound, so further rate reductions to 0% or into negative territory seem ruled out,” Mendes wrote.
So, perhaps not. But with new coronavirus updates changing hour by hour, it’s getting harder to believe that nothing is off the table. The bank appeared confident, however, that its decision today will help us out of this mess.
“The intent of our decision today is to support the financial system in its central role of providing credit in the economy,” it said, “and to lay the foundation for the economy’s return to normalcy.”
The next rate announcement is scheduled for April 15.