This morning, the Bank of Canada left its target overnight benchmark rate unchanged at ¼ percent, which the Bank has framed as its effective “lower bound.”
This decision was expected after the BoC lowered its target for the overnight rate 150 basis points since the beginning of March.
Comparing the Bank’s two most recent statements (today and March 27, 2020), we find several notable new comments on the economy and financial markets:
- While the outlook is “too uncertain” to provide a complete forecast, analysis of alternative scenarios suggests the level of real economic activity was down 1-3 percent in the first quarter of 2020 and will be 15-30 percent lower in the second quarter than in Q4 2019.
- CPI inflation is expected to be close to 0 percent in the second quarter of 2020 “primarily due to the transitory effects of lower gasoline prices.”
- Efforts to contain the COVID-19 pandemic have “caused a sudden and deep contraction in economic activity and employment worldwide.”
- In financial markets, this has driven a “flight to safety and a sharp repricing of a wide range of assets” and has pushed down prices for commodities.
- One “early measure of the extent of the damage” was an unprecedented drop in employment in March, with more than one million jobs lost across Canada. Many more workers reported shorter hours, and by early April some six million Canadians had applied for the Canada Emergency Response Benefit.
- Fiscal programs, “designed to expand according to the magnitude of the shock,” will help individuals and businesses weather this shutdown phase of the pandemic, and support incomes and confidence leading into the recovery.
The Bank also reported that it is “temporarily increasing” the amount of Treasury Bills it acquires at auctions to up to 40 percent, effective immediately.
More new measures to support Canada’s financial system
The BoC also announced new measures to provide additional support to Canada’s financial system and ease pressure on Canadian borrowers including the development of:
- A new Provincial Bond Purchase Program of up to $50 billion to supplement its Provincial Money Market Purchase Program.
- A new Corporate Bond Purchase Program, in which the Bank will acquire up to a total of $10 billion in investment-grade corporate bonds in the secondary market.
The central bank promised both programs will be put in place in the coming weeks. The Bank also announced it is enhancing its Term Repo Facility to permit funding for up to 24 months.
As containment restrictions are eased and economic activity resumes, BoC believes that fiscal and monetary policy actions will help “underpin confidence and stimulate spending by consumers and businesses to restore growth.”
The Bank also released its Monetary Policy Report for April. During a related news conference, Stephen Poloz, Governor of the Bank of Canada noted that the Bank has so far “accumulated over $200 billion of new assets—amounting to about 10 percent of Canada’s GDP – in liquidity support for the economy.”
BoC’s next scheduled policy announcement is June 3, 2020 and in the ensuing period the Bank’s Governing Council noted that it “stands ready to adjust the scale or duration of its programs if necessary.” It further stated that all of its actions are “aimed at helping to bridge the current period of containment and create the conditions for a sustainable recovery and achievement of the inflation target over time.”