By Gloria Galloway
OTTAWA (MaceNews) – The Bank of Canada has dropped its target overnight rate for the third time in less than a month as it tries to mitigate the financial and economic damage of the COVID-19 pandemic.
Stephen Poloz, the bank’s governor, announced Friday morning that the rate would fall 50 basis points to 0.25%. Just a few weeks ago it stood at 1.75%.
“This unscheduled rate decision brings the policy rate to its effective lower bound, to provide support to the Canadian financial system and to the economy during the COVID-19 pandemic,” Poloz told a hastily called news conference.
“Low interest rates help to cushion the shock by easing the cost of borrowing. We are also working to keep the financial system functioning, helping make sure credit is available to people and companies,” he said. “The intent of our decision today is two-fold: to immediately support the financial system so it keeps on providing credit, and, over the longer term, to lay the foundation for the economy’s return to normalcy.”
The Bank Rate is now 0.5% and the deposit rate is 0.25%.
The bank also announced a new Commercial Paper Purchase Program (CPPP) as a way of restoring a key source of funding for business.
For the next 12 months, the bank will conduct primary and secondary market purchases of commercial paper, including asset-backed commercial paper, issued by Canadian firms, municipalities and provincial. The bank will purchase commercial paper with a tenor of up to three months of sufficiently high quality, broadly equivalent to a minimum short-term credit rating of R-1 (high/mid/low).
The bank will use an agent to undertake these transactions. The agent, the start date of the program and additional details will be announced next week.
The Bank defines its decision to purchase of Government of Canada bonds as large-scale asset purchases. “But many prefer to use the term quantitative easing,” Poloz told a later news conference held Friday afternoon with Canadian Finance Minister Bill Morneau.
“This will help address strains in the Government of Canada debt market and enhance the effectiveness of all other actions taken so far,” said Poloz. “We will keep this program going until it’s clear the economic recovery is well under way.”
In response to reporters’ questions, the governor said the job of the bank is to ensure there are policies in place to cushion the blow of the virus, which is wreaking financial havoc around the world, and also to soften the impact of low oil prices which are placing an additional strain on Canada’s economy.
The job of the bank is to complement to efforts being made by the Canadian government, he said “and to be looking ahead to what the recovery will look like and to what the economy will need then.”
Poloz said the bank’s purchases are geared toward supporting the smooth functioning of financial markets. He also defended the bank from a suggestion that its asset purchases in markets have been overly aggressive, saying no one criticizes a firefighter who uses too much water. Poloz said the bank has plenty of scope to continue its asset purchases.
Poloz added that monetary policy is playing a supporting role in cushioning the economic impact of the corona virus, and that fiscal policy is obliged to take the lead.
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This story has been updated with reference to later news conference.