- The Bank of Canada kept its policy rate at 0.25% this morning. It reiterated in its opening statement that this is the “effective lower bound” for the policy rate.
- The Bank also maintained its asset purchase programs. Over the last two months, the central bank’s balance sheet has increased by $339bn, to $464bn. This increase has largely been due to purchases of government of Canada securities ($243bn) and securities purchased under repo agreements ($204bn). These measures, along with purchases of provincial and corporate debt have eased borrowing rates and improved liquidity.
- The success of the short-term funding facilities caused the Bank to reduce the frequency of its term repo operations to once a week (from twice a week) and its bankers’ acceptance purchases to bi-weekly (from a weekly cadence).
- The Bank’s communique highlighted the severe economic impact of COVID-19 and related shutdowns. It forecasts that the “level of real GDP in the second quarter will likely show a further decline of 10-20 percent”. This is a significant drop in economic output, but not as bad as the most severe scenario presented in the Bank’s April Monetary Policy Report (MPR), which envisioned a 30% decline in activity. The Bank of Canada also stated that the economic shock “appears to have peaked”, but hedged this by stressing that the economic recovery is highly uncertain.
- Today was also the first day on the job for the new Governor Tiff Macklem. The new Governor was an observer to the deliberations leading to today’s decision and gave his endorsement.
Key Implications
- As far as first days on the job go, this one was pretty smooth. That said, over the next few months we will keep close watch on the communication coming from Governor Macklem. We will be on the lookout for signs of change in the Bank of Canada’s policy approach. Of particular importance will be guidance with respect to its swelling balance sheet.
- The Bank’s assessment of its current policy efforts is reasonable. A combination of policy interest rate cuts and balance sheet operations, including liquidity, have been effective at bringing down both short-term funding costs and long-term rates for banks, provinces, businesses, and consumers. Please see our latest report on the future path of Bank of Canada policy.
- Overall, the announcement today supported the Bank’s existing policy actions. It also maintained its openness to push harder on current policy efforts, such as asset purchases, should the economy experience any hiccups during recovery. The current shock will require a nimble hand and the Bank of Canada has maintained its commitment to do everything it can to help the economy get back to normal as fast as it can.
