The Bank of Canada announced Friday it has lowered its target for the overnight rate by 50 basis points to 0.25 per cent.
The Bank Rate is correspondingly 0.5 per cent and the deposit rate is 0.25 per cent.
“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,” said the Bank in a news release.
“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 said it 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,” said the Bank.
“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.”
The Bank also launched two programs on Friday. 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. And it said 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 Bank of Canada joined the string of central banks throwing the kitchen sink at the economy. In a move we’ve been expecting, the Bank of Canada cut rates another 50bps, bringing the target for the overnight rate down 0.25 per cent,” said Royce Mendes, an economist with TD Economics.
While central bank stimulus can’t bring the economy back to life on its own, the Bank of Canada’s actions will help alleviate some of the pain and support the recovery, whenever that begins.”
