The Toronto skyline in Canada

Canada Monetary Policy April 2020

Canada: Bank of Canada keeps rates unchanged in April but draws on other policy tools to enhance liquidity

On 15 April, the Bank of Canada (BoC) kept its target for the overnight rate at 0.25%, its effective lower bound. The decision had been expected and followed three consecutive 50-basis-points cuts in March. Moreover, the Bank announced an expansion of its asset purchase programs to support strained financial markets.

The Bank’s decision to introduce new monetary stimulus measures was driven by the unprecedented economic outlook owing to depressed oil and gas prices, and the Great Lockdown recession. Moreover, the current rate is estimated to be at the effective lower bound, meaning a cut in rates would likely have no positive bearing on the economy. That being said, the Bank highlighted the economy was running close to potential before the crisis, noting: “Just as a healthy, fit individual is more likely to shake off a Covid-19 infection, a healthy economy is more likely to recover quickly from a major negative shock.”

Nevertheless, a sharp decline in activity has weighed on inflation expectations and the Bank highlighted the importance of inflation targeting in times of an economic downturn. The risk of inflation falling too far below target would hurt the economy, by raising the real value of debt and the cost of servicing debt. Therefore, the Bank has stepped up its measures to cushion the blow to the economy and support a smooth recovery by ensuring sufficient liquidity in the market.

The Bank’s purchase program of Treasury bills announced in late March, was increased notably from its previously stated 25% to up to 40% in mid-April. The Bank also announced a Corporate bond purchase program—capped at CAD 10 billion—and decided to purchase up to CAD 50 billion worth of Provincial bonds—in conjunction with its current purchasing program of Provincial bills. Meanwhile, over the past month there was a notable rise in Mortgage bond purchases. By the end of November 2019, the Bank held roughly CAD 517 million worth of mortgage bonds. Since then, the Bank has acquired nearly CAD 2.1 billion worth of mortgage bonds, which should provide sufficient liquidity to keep the housing market afloat.

So far, the Bank has accumulated CAD 200 billion in new assets (roughly 10% of GDP). Going forward, the Bank will continue to expand its balance sheet in accordance with developments in financial markets. The expansion of the balance sheet will depend on the extra liquidity needs in markets as the pandemic runs its course, and the BoC stated its purchase of Treasury bills could be increased at any time should the outlook deteriorate further. That said, the Bank also noted the balance sheet expansion should reverse over time once the pandemic subsides.

The next monetary policy meeting is scheduled for 3 June.

Free sample report

Access essential information in the shortest time possible. FocusEconomics provide hundreds of consensus forecast reports from the most reputable economic research authorities in the world.
Close Left Media Arrows Left Media Circles Right Media Arrows Right Media Circles Arrow Quote Wave Address Email Telephone Man in front of screen with line chart Document with bar chart and magnifying glass Application window with bar chart Target with arrow Line Chart Stopwatch Globe with arrows Document with bar chart in front of screen Bar chart with magnifying glass and dollar sign Lightbulb Document with bookmark Laptop with download icon Calendar Icon Nav Menu Arrow Arrow Right Long Icon Arrow Right Icon Chevron Right Icon Chevron Left Icon Briefcase Icon Linkedin In Icon Full Linkedin Icon Filter Facebook Linkedin Twitter Pinterest