In an unscheduled announcement earlier today (March 27) the Bank of Canada lowered its target for the overnight rate by 50 basis points to 0.25% to support to the Canadian financial system and the economy during the COVID-19 pandemic.
“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 pandemic-driven contraction has prompted decisive fiscal policy action in Canada to support individuals and businesses and to minimize any permanent damage to the structure of the economy,” the bank said in a statement.
Governor Stephen Poloz said that the intent of today’s decision 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.
This is the third cut by the Bank in the past month, with a total reduction of 1.5%. The Bank is not currently considering negative rates.
Quantitative Easing? Or not?
The Bank launched two programs – a Commercial Paper Purchase Program (CPPP) which will help to alleviate strains in short-term funding markets, and a program involving the purchasing of Government of Canada securities in the secondary market. Purchases will begin with a minimum of $5 billion per week, across the yield curve. The Bank said its efforts have been primarily focused on ensuring the availability of credit by providing liquidity to help markets continue to function. “To promote credit availability, the Bank has expanded its various term repo facilities. To preserve market function, the Bank is conducting Government of Canada bond buybacks and switches, purchases of Canada Mortgage Bonds and banker’s acceptances, and purchases of provincial money market instruments,” the Bank said in a report.
At a press conference, Governor Stephen Poloz said that he wouldn’t argue with anyone calling it quantitative easing but said that today’s announcement was not a true QE program. “The objective is to restore good market function in financial markets. QE programs do help restore functionality, so the two are closely related, but we are doing large scale asset purchases to help market functioning.”
Deputy Governor Carolyn Wilkins added that the Bank is purchasing securities across the full yield curve. “If we were to look beyond market functioning to yeild curve control, then the amount to purchase would be geared to purchasing that,” she said. She also said that it is unlikely that these cuts will have a tremendous impact on housing demand, and was aimed more at helping businesses.
What it means?
“The most striking thing is that the Bank’s government bond purchases will seemingly be open-ended. It said that it will buy a minimum of $5 billion worth of bonds across the yield curve per week. While that minimum level would leave the Bank buying bonds amounting to 0.2% of 2019 GDP each week, it might end up buying a lot more. The Bank’s new measures should help to ease the signs of stress that are still clear in funding markets. But while the CPPP will help to reduce the risk that otherwise solvent firms are squeezed by funding pressures, it will do little for those companies that are facing substantial hits to their revenue and unable to secure funding at all. We still think policymakers need to go further, by announcing measures similar to those seen elsewhere, that would allow either the Bank or the Department of Finance to lend directly to the private sector,” Capital Economics’ senior Canadian economist Stephen Brown said.
Is this the bottom?
"Central banks cutting interest rates are equivalent to injecting money into the economy by making it cheaper for borrowers to access capital," says Ian Tam, CFA, Morningstar's Director of Investment Research. "From an individual investor’s standpoint, these recent and possibly temporary rate cuts should not sway your long-term asset allocation decisions which again largely depend on your ability to withstand risk (inclusive of interest rate risk)."
“While concrete and sizeable stimulus measures should indeed help to revive investor sentiment and alleviate pressure on the markets, a durable and sustainable market bottom will ultimately depend on the successful containment of the virus globally. With little visibility on the depth and duration of the economic fallout as the virus continues to spread across Europe and the US, investors will be beholden to virus-related headlines that are likely to inflict more periodic episodes of volatility and the erratic market gyrations that come with it. As such, its too soon to call a market bottom,” Fiera Capital’s Candice Bangsund said.
DBRS Morningstar's senior VP of North American financial institutions Robert Colangelo pointed out that the “staggering jobless claims forced the Bank to react, perhaps earlier than anticipated, and cut rates. It is possible that a move to 0 is on the table.”
He also said that there would be short term margin pressure on Canadian Banks, but they are adept at managing these situations. “The large Canadian banks are well positioned, they have adequate funding, liquidity and capital positions. The small and medium size bank may experience difficulty, but all in all, we believe the banking system is well positioned to face the impact of this downturn,” he said.
The Bank of Canada also said that it is closely monitoring economic and financial conditions, in coordination with other G7 central banks and fiscal authorities and will update its outlook in mid-April. The next scheduled Bank of Canada meet is scheduled for April 15.
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