The Conference Board of Canada’s Senior Economist Robyn Gibbard offers the following insights on today’s Bank of Canada announcement:
The Bank of Canada this morning cut interest rates by 50 basis points, to 0.25 per cent. It also announced new programs to purchase debt from municipal governments, provincial agencies, and corporations, and to make large buy-backs of Government of Canada debt. The buy-back program in particular is an important step and indicates that the Bank is moving beyond traditional monetary policy to more extraordinary measures.
- The Bank of Canada cut its overnight rate by 0.5 percentage points to 0.25 per cent this morning. This move brings Canada’s overnight rate in line with the US Federal Reserve’s federal funds rate.
- In addition to the rate cut, the Bank announced two new programs this morning. The Commercial Paper Purchase Program will see the Bank of Canada purchasing short-term corporate, municipal, and provincial agency debt. Additionally, the Bank will begin buying buy-backs of a minimum of $5 billion per week of Government of Canada bonds and treasuries on the secondary market.
- Governor Poloz and Deputy Governor Wilkins did not characterize these moves as quantitative easing, although Governor Poloz said he would not argue with anyone who chose to characterize it that way. Deputy Governor Wilkins emphasized that today’s action was aimed only at ensuring continued market functioning, whereas a “proper” QE program would involve targeting specific spreads along the yield curve. The Bank of Canada was unique among its peers in that it did not use QE during the 2008-09 financial crisis.
- The rate cut and two new programs this morning add to a wide range of actions the Bank of Canada has taken this month. Since March 4 the Bank has cut rates by 150 basis points, expanded its term repo facilities, increased its purchases of Government of Canada bonds, begun purchasing mortgage-backed securities, and has been purchasing bankers acceptances. All of these measures are intended to ensure that all actors in the financial system, from governments to banks to businesses, have access to adequate liquidity.
- We were somewhat surprised to see the Bank’s communique refer to 0.25 per cent as the “lower bound.” The most recent official word on the subject, a 2016 research paper by the Bank, had calculated the lower bound at -0.50 per cent. Governor Poloz this morning described this -0.50 level as a “theoretical” lower bound, but said that the financial system cannot handle rates below 0.25 at this time.
- One of the primary factors that determines the lower bound is the sustainability of the banking sector. Given that many Canadian households are carrying large amounts of debt, and given that more than a million Canadians will lose their jobs this month alone, many loans will likely become non-performing. That will put pressure on bank balance sheets, and cutting rates further would put them under even more strain. The Bank may therefore believe that in the current circumstances the lower bound is temporarily higher than previously calculated.
- The Canadian dollar’s value has gone up against the US dollar in recent days, as global flight to the greenback has eased. The rate cut announced this morning will likely cause the Loonie’s value to fall back again.
- The next scheduled rate decision would normally be April 15, 2020. Governor Poloz this morning emphasized that while they will publish their latest economic outlook at that time, the Bank of Canada is not considering further cuts going forward. However, the Bank is still committed to providing further supports for financial markets as needed in the coming weeks.