Canada: Bank of Canada cuts rates by 50 basis points for second time in March amid coronavirus anxiety
March 13, 2020
On 13 March, the Bank of Canada (BoC) held an unscheduled meeting and cut its target for the overnight rate from 1.25% to 0.75%, following its previous 50 basis-point cut on 4 March. The rate cut, which came into effect on 16 March, was part of a coordinated effort among policy makers in Ottawa to proactively buffer the economy against the fallout from the coronavirus (Covid-19) outbreak and the sharp drop oil prices—which have fallen roughly 50% since the start of the year.
The Bank’s decision to cut its key policy interest rate was driven by the impact Covid-19 is likely having on households and the economy at large. The virus poses a significant risk to private consumption levels, while the recent drop in oil prices is likely having a notable impact on energy producing regions. Moreover, lending conditions have tightened notably due to financial institutions re-pricing risk amid heightened uncertainty among businesses, which will be weighing on fixed investment. Therefore, the Bank decided to cut rates to the lowest level since September 2017.
The Bank also took several additional measures to ensure sufficient liquidity in the financial system. In a combined effort with the Ministry of Finance and the Office of the Superintendent of Financial Institutions (OSFI), the government established a Business Credit Availability Program (BCAP). The BCAP will provide more than CAD 10 billion in financing and credit insurance to support Canadian businesses. In addition, OSFI lowered the stability buffer for domestic banks by 1.25% of risk-weighted assets, which is expected to bolster Canadian charter bank’s lending capacities by roughly CAD 300 billion.
Officials also introduced a Bankers’ Acceptance Purchase Facility program aimed at fostering lending to small and medium-size businesses; added new repo operations with terms of 6 and 12 months; and is expected to launch the Standing Term Liquidity Facility (STLF), which will support financial institutions’ short-term liquidity needs.
The government also decided to push back the introduction of the new benchmark rate for the minimum qualifying rate of insured mortgages until further notice, and will also unveil a significant fiscal stimulus package to support household spending and the labor market in the coming weeks.
Commenting on the outcome of the meeting, Brain DePratto, a senior economist at TD economics, noted:
“Social and economic disruptions related to the virus will likely worsen in the coming weeks, but with the right supports in place, including those announced today, the peak economic impact has a good chance of being contained to a relatively short period. It will be hard to avoid an economic contraction in the second quarter due to social distancing efforts by businesses and overall activity, but a near-term recession is certainly not a forgone conclusion and that risk is now moving back to the tail of the distribution. Important to this outcome is that the U.S. government delivers an equally timely and sizeable response to backstop their economy and shore up the broader global market and sentiment.”
The next monetary policy meeting is scheduled for 15 April.
Author: Steven Burke, Economist