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Bank of Canada Maintains Overnight Rate, Scales Back COVID-19 Stimulus Programs
The Bank of Canada overnight rate stayed at 0.25% after the June 3, 2020 rate announcement. This was previously stated as the “lower effective bound.”
However, while the interest rate stayed the same, not all market operations put in place due to the COVID-19 pandemic followed suit — some of them scaled back as they were having their intended effect.
“After significant strains in March, short-term funding conditions have improved,” the Bank of Canada (BOC) stated.
Changes implemented were:
- The frequency of the term repo operations (where the BOC buys government bonds) was reduced to once per week.
- The program to purchase bankers’ acceptances (short-term debt from banks) was reduced to bi-weekly operations.
The BOC said that it will adjust these programs if needed.
The other COVID-19 programs to purchase federal, provincial, and corporate debt are continuing at their present frequency and scope.
Signs of Improving Financial Conditions?
While the BOC said that incoming data confirms the severe impact of COVID-19 on the Canadian economy, they also said that impact appears to have peaked.
“Financial conditions have improved, and commodity prices have risen in recent weeks after falling sharply earlier this year,” the BOC said. “Because different countries’ containment measures will be lifted at different times, the global recovery likely will be protracted and uneven.”
Measures such as “massive policy responses in advanced economies” have cushioned the effect of the economic shutdowns, the BOC said.
So far, the Canadian economy appears to have not been as severely hit as predicted.
The level of real GDP in the first quarter of 2020 was 2.1% lower than in the fourth quarter of 2019. The BOC said the level of real GDP could decline a further 10-20% in the second quarter.
“Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery,” the BOC said.
The BOC expects the economy to resume growth in the third quarter.
This follows what Bank of Canada Governor Stephen Poloz (who completed his term on June 2, 2020) said in his final press conference in May 2020.
“‘We have to be able to manage the risks around those things, so I’m not going to dismiss’ dire scenarios, Poloz said during a media roundtable, conducted online,” Bloomberg reported. “But, me personally, I do think on balance what I’m hearing, the flow that I’m hearing, is a little too dire, a little bit overblown.”
The next BOC release is scheduled for July 15, 2020.
“The Bank maintains its commitment to continue large-scale asset purchases until the economic recovery is well underway,” the BOC said.
“Any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.”
Read the full June 3 Bank of Canada rate announcement: https://www.bankofcanada.ca/2020/06/fad-press-release-2020-06-03/
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