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Coronavirus leads to another Bank of Canada rate cut of 50 bps, launches quantitative easing program

Jessy Bains
·3 mins read
(Reuters)
(Reuters)

The Bank of Canada has cut its benchmark interest rate by another 50 bps to 0.25 per cent, over lingering concerns about the economic impact of the coronavirus.

Today’s cut brings the overnight rate to the lowest level since the financial crisis a decade ago.

It’s the third cut since the COVID-19 outbreak began. One of the Bank of Canada’s goals with the cuts is to cushion the blow of COVID-19 with lower mortgage payments.

“The spread of COVID-19 is having serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices,” said the Bank of Canada in a release.

“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 loonie (CADUSD=X) fell about half a cent in the moments after the announcement.

Canada’s central bank also launched two new programs, to maintain stability and shield the economy from the effects of COVID-19.

“First, the Commercial Paper Purchase Program (CPPP) will help to alleviate strains in short-term funding markets and thereby preserve a key source of funding for businesses.”

“Second, to address strains in the Government of Canada debt market and to enhance the effectiveness of all other actions taken so far, the Bank will begin acquiring Government of Canada securities in the secondary market.”

Buying starts at a minimum of $5 billion per week across the yield curve.

“The program will be adjusted as conditions warrant, but will continue until the economic recovery is well underway. The Bank’s balance sheet will expand as a result of these purchases,” said the Bank of Canada.

During the news conference, Bank of Canada Governor Stephen Poloz said “going lower is a theorotical possibility but not one we’re contemplating.”

He also didn’t rule out negative interest rates but says there would be negative effects of going down that road.

CIBC economist Royce Mendes doesn’t expect a further cut, but does think there’s room for the Bank of Canada to increase asset purchases.

“There is room for the quantitative easing purchases to grow even larger.” he said in a note.

“While central bank stimulus can't bring the economy back to life on its own, the Bank of Canada's actions will help alleviate some of the pain and support the recovery, whenever that begins.”

Poloz wouldn’t say if Canada is headed for a recession. He says there will be an update on the effects of the Bank of Canada’s actions on April 15.

When asked if the Bank’s action go too far he said “a firefighter is never criticized for using too much water.”

Prime Minister Justin Trudeau said he was happy with the Bank of Canada’s actions to support the economy during an update on measures to fight COVID-19.

Mortgage savings

The ball is in the Canadian lenders’ courts now. They will decide how much of the savings from today’s cut they’ll pass on to customers.

“Assuming lenders pass the full 50 basis point rate cut to consumers, as they have done with the previous two rate cuts, Canadians who currently have a variable rate mortgage will see their rates fall by a further 0.50% bringing their total rate drop to 1.50% in March,” said James Laird, Co-founder of Ratehub.ca.

“For every 1.50% a variable mortgage rate drops, borrowers stand to save approximately $860 per year for each $100,000 of their mortgage balance.”

But lenders have actually raised rates on some mortgages recently as they price in a risk premium over uncertainty over COVID-19.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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