By Brian DePratto
The Bank of Canada cut its policy interest rate a further 50 basis points on Friday, to 0.25% (from 0.75%), in another inter-meeting cut. The level of the policy interest rate is now back to the lows reached in the Global Financial Crisis. Notably, the statement accompanying the decision referred to 0.25% as the 'effective lower bound' – suggesting that any additional monetary easing will not be in the form of rate cuts.
Indeed, the Bank of Canada also announced two quantitative easing programs. The first is the "Commercial Paper Purchase Program" (CPPP), to reduce strains in short term funding markets. In addition, to both address market strains and ensure the effectiveness of other actions taken, the Bank will begin purchasing Government of Canada debt in the secondary market. The Bank will purchase a minimum of $5-billion per week, across all maturities. The Bank has stated that these purchases might be adjusted as conditions warrant, and will continue 'until the economic recovery is well underway.'
The statement justifying these moves was understandably short as by now everyone understands the gravity of the economic challenge facing Canada. The Bank highlighted its role in complementing fiscal and other responses, providing a cushion to the shock and keeping the financial system functioning and credit available to those that need it.
Unsurprisingly, the Bank maintained its messaging around its willingness to respond as needed as conditions warrant – keeping further inter-meeting actions firmly on the table.
More help is here. Bank of Canada Governor Stephen Poloz and his team have been proactive and creative in their response to the pandemic, and today's announcement continues this trend. The Bank of Canada not only sliced its policy rate back to 0.25%, but also delivered two new asset purchases programs, including quantitative easing 'proper', specifying that its purchases of Government of Canada securities will result in a larger balance sheet. These are welcome developments that, together with the string of liquidity and other measures of recent weeks, provide a solid backstop to the Canadian financial system. These actions should also reinforce the transmission of monetary policy, providing a fair bit of gas to the economic recovery when the pandemic is finally behind us.
Getting from here to there will not be easy, and so we should not be surprised to see further announcements in the coming weeks as markets digest the implications of the economic sudden stop (see our recent forecast update for our current estimates of the implications on growth and labour markets).
Looking ahead, in a break from past research and communications that had put negative interest rates on the table, Governor Poloz and his team have now seemingly ruled any further cuts out, referring to 0.25% as the effective lower bound. This had been hinted at by the Governor in recent weeks – and in the press conference following this morning's rate decision the Governor noted that negative rates are still in the toolkit, but experiences in other countries have seen challenges to the financial system result from these policies.
Thus, while they're not completely ruled out, the Governor's view is that negative rates are "not sensible" at this stage. Clearly then, any further easing will take the form of increased purchases of government securities, and/or adjustments to other purchase programs to ensure that monetary stimulus is being transmitted fully to all corners of the financial system.