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By Brian DePratto
• Apr 15, 2020
Senior Economist, TD Economics

By Brian DePratto
Senior Economist

As expected, the Bank of Canada left its policy rate at 0.25% this morning.

After a full percentage point of cuts since its last formal decision, the policy rate now sits at what Governor Stephen Poloz sees as the "effective lower bound." Easing instead came in the form of new asset purchase programs. The Bank of Canada's purchases of Provincial bills will be joined by purchases of up to $50-billion of Provincial bonds, and the Bank of Canada also plans to buy up to $10-billion of investment grade corporate bonds. The timing of these purchases was not immediately available. Term repo operations will be lengthened to up to 24 months to further enhance the transmission of monetary stimulus.

The statement that came with the decision was unsurprisingly downbeat and focused on developments to date. The key message was that "The Bank’s Governing Council stands ready to adjust the scale or duration of its programs if necessary." Further rate cuts may be off the table, but the Bank of Canada clearly stands ready to scale up purchases as needed.

The unprecedented nature of the shock resulted in an unprecedented Monetary Policy Report. Given the considerable uncertainty at present, gone are the standard forecast tables. Scenario analysis is now in their place that hinges on the length of pandemic response measures and the adjustment process thereafter. The Bank of Canada suggests that the level of GDP in the second quarter could be between 15% and 30% lower than where it ended last year.

Taking Statistics Canada's nowcast into account from this morning, this implies an annualized contraction in Q2 of between -40% and -70%, though annualized figures have little meaning in this context given the nature of the shock. Both of the Bank of Canada's scenarios appear to include a reasonably sharp rebound thereafter, but over the longer term a 'U-shaped' recovery appears to be their median assumption (our Chief Economist's latest perspective talks about the various 'recovery letters' and what they mean). Even the high end of the provided range (the optimistic scenario) doesn't seem to show GDP regaining its pre-pandemic level until early next year.

An annual re-assessment of the economy's long-term running speed (potential growth) and the neutral rate of interest that typically come in April, will instead be provided in October. These have important implications for the Bank of Canada's 'exit strategy,' but given the significant uncertainty at present, waiting for more clarity on the actual economic outcomes is a prudent course of action.

Key implications

There may not be a traditional forecast here, but the Bank of Canada's messaging is clearly 'buckle your seatbelts.' Even in its optimistic scenario, the Bank of Canada foresees an unprecedented economic shock. Of course, this has been matched by an unprecedented response from Governor Poloz and his team with a rapid easing of the policy interest rate and expansion in the balance sheet due to asset purchases. We saw them turn the dial even more today by expanding their list of asset purchases to help ease strains funding markets. And, this may not be the last of it. The current intended purchases may subsequently exceed initial thresholds depending on the duration of this economic stoppage.

Both the decision statement and the opening statement of the press conference reinforced that as much as has been done to date, there is no question that more will come if needed. The economy is facing an intense shock, and the Bank of Canada clearly intends to do all it can to not only soften the blow, but also speed up the recovery.

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