Bank of Canada Governor Stephen Poloz speaks during a news conference on Parliament Hill, in Ottawa, on March 18, 2020.DAVE CHAN/AFP/Getty Images
The Bank of Canada has cut its key interest rate another half-percentage point, to 0.25 per cent – matching its all-time low – and took its first steps toward quantitative easing on Friday in response to the COVID-19 crisis.
In addition to the rate cut – its second half-point emergency cut this month – the bank announced a new program for a minimum $5-billion-per-week of market purchases of Government of Canada bonds, “to address strains in the government of Canada debt market and to enhance the effectiveness of all other actions taken so far.” The move 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.”
It also announced a new commercial paper purchase program, further expanding its efforts to provide liquidity to financial markets and keep credit flowing in an economy reeling from COVID-related business shutdowns and layoffs.
Bank of Canada Governor Stephen Poloz has announced an interest-rate drop to 0.25 per cent and two new programs in response to the COVID-19 crisis. He says the moves will “position the economy very well for its recovery once we have things return to a normal situation.”
The Globe and Mail
The Bank of Canada has cut its key interest rate another half-percentage point, to 0.25 per cent – matching its all-time low – and took its first steps into quantitative easing on Friday in response to the COVID-19 crisis.
In addition to the rate cut – its second half-point emergency cut this month – the bank announced a new program to buy at least $5-billion a week in Government of Canada bonds on the open market “to address strains in the government of Canada debt market and to enhance the effectiveness of all other actions taken so far.” The move is the bank’s first-ever foray into large-scale asset purchases – similar to the programs known as quantitative easing (QE) that the U.S. Federal Reserve and other major central banks employed during the 2008-09 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.”
It also announced a new commercial paper-purchase program, further expanding its efforts to provide liquidity to financial markets and keep credit flowing in an economy reeling from business shutdowns and layoffs related to COVID-19.
“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 central bank said in a news release on Friday. “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,” it said.
The Bank of Canada had been widely expected to announce further rate cuts since the U.S. Fed reduced its own rate to a range of zero to 0.25 per cent in mid-March, and other major central banks took their rates toward zero. Calls have also been growing in the financial community for a QE program, as a way for the bank to significantly increase its policy response.
With the Canadian government moving forward on a $52-billion emergency aid program, and with the Bank of Canada having already taken numerous steps in the past two weeks to address market liquidity, the bank decided the time was right to open its policy taps.
“A firefighter has never been criticized for using too much water,” Bank of Canada Governor Stephen Poloz said in a conference call with reporters on Friday.
However, Mr. 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.
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.”
The bond purchase program was generally viewed by experts as signalling the bank’s entry into quantitative easing – an unconventional monetary policy in which a central bank expands its balance sheet by buying assets, typically in a bid to drive interest rates lower in certain segments of the market. While Mr. Poloz said, “I’m not resisting calling this a QE program,” he noted that the bank’s move is aimed at financial stability rather than influencing interest rates, and will be spread across the entire yield curve, rather than targeting specific maturities.
“When we’re adopting a true QE program, we would announce it as such, and indicate exactly what our objectives were,” he said.
Nevertheless, economists said the program is effectively a form of QE, and gives the Bank of Canada a ready-made tool to expand to address its monetary policy needs if and when necessary – especially now that its interest rate is essentially at its lower limit.
“We think the next step would be to increase the pace of asset purchases and potentially broaden their scope," said Josh Nye, senior economist at Royal Bank of Canada. “That could mean buying more [Government of Canada] securities or ramping up [Canada Mortgage Bond] purchases to more QE-like levels. We also wouldn’t rule out more substantial purchases of provincial and corporate securities ... if needed.”
The Bank of Canada acted on the same day the federal government announced a further expansion of its supports for ailing businesses. Mr. Poloz said the central bank’s rate cuts – by 1.5 percentage points in three stages since the beginning of March – will play a smaller role than the government’s fiscal efforts in carrying the economy through the severe COVID-19 disruptions.
“Our job is more of a complimentary role, to ensure that financial markets are working well and that those [fiscal] policies will work well, and to be looking ahead to what the recovery will look like and what the economy will need then,” Mr. Poloz said. “The economy will need these kinds of support in order to ensure a quick resumption of activity.”
He added that the dramatic decline in the price of oil – Canada’s biggest export – in itself justified further reducing interest rates “if the COVID-19 had not even occurred.”
However, he was largely dismissive of the startling declines in private-sector economists’ outlooks for second-quarter growth – with some now seeing the economy contracting at an annualized rate of more than 30 per cent over the next three months. He called them exercises in “arithmetic” rather than useful economic projections.
“I’m not too interested in those particular numbers, [but] rather making sure that we’ve got policies in place that cushion the blow and mitigate, or avoid as much as possible, structural damage to the economy,” he said.
“We aren’t in a forecasting contest here.”
Royal Bank late Friday cut its prime rate by 50 basis points to 2.45 per cent; other banks were expected to follow.
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