The Bank of Canada slashed interest rates for a third time in a matter of weeks and announced plans to acquire more commercial paper and government securities to help shield the nation’s economy from coronavirus fallout. On March 27, the central bank lowered its policy rate by another half a percentage point to 0.25%, adding in a statement that the unscheduled rate decision brings the rate down to its effective lower bound. The Bank of Canada last cut rates to these levels in 2009, during the global financial crisis.

The move was necessitated by quickly deteriorating conditions, including a flood of new jobless claims, that suggest the economy is poised to produce one of the sharpest drops in economic activity in history.

Policy makers led by Governor Stephen Poloz announced two new programs: the Commercial Paper Purchase Program and the buying of Canadian government securities in the secondary market. The government securities purchases will begin with a minimum of $5 billion per week, across the yield curve, the bank said in its statement. This is the bank’s first-ever foray into large-scale asset purchases – similar in many ways to the quantitative easing (QE) programs the U.S. Federal Reserve and other major central banks employed during the 2008-2009 financial crisis. The bank said it will adjust the program “as conditions warrant,” and pledged to continue “until the economic recovery is well under way.”

As the spreading coronavirus outbreak paralyzes economies globally, the energy-heavy Canadian economy is also having to contend with the crash in oil prices — prompting a steady drumbeat of recession calls.

The move by the central bank is part of a wave of policy rate cuts and brings Canada’s benchmark rate closer to most other advanced industrialized economies. The Bank of Canada has now lowered interest rates three times in March, with a cumulative easing of 1.5 percentage points. 

The moves were generally welcomed by central bank experts, many of whom felt the Bank of Canada had fallen behind the broader international monetary-policy response to COVID-19. “The Bank of Canada joined the string of central banks throwing the kitchen sink at the economic downturn,” Canadian Imperial Bank of Commerce senior economist Royce Mendes said in a research note. “Governor Poloz is signalling a willingness to be aggressive in battling the shock, a sharp change from a central bank that had previously been hesitant to stoke the fires of household debt accumulation with potentially unnecessary rate cuts.”

Bank of Canada Governor Stephen Poloz made it clear that the bank has no intention of cutting its rate further, and rejected the idea of negative interest rates similar to those at the European Central Bank. “At this stage, it would be not sensible to think of interest rates going lower than this. We consider this to be the effective lower bound,” Mr. Poloz said.

After the announcement on March 27, Royal Bank cut its prime rate by 50 basis points to 2.45%; other banks were expected to follow.

Source: Globe & Mail
Source: Financial Post