The Bank of Canada Interest Rate and the COVID-19 Pandemic
Since March 4, 2020, the Bank of Canada interest rate has undergone several changes:
- On March 4, 2020 the overnight rate decreased from 1.75% to 1.25%
- On March 13, 2020, it was further lowered from 1.25% to 0.75%
- On March 27, 2020, it was again lowered from 0.75% to 0.25%
The latest Bank of Canada (BOC) interest rate announcement came on April 15, 2020 and this time there were not any changes. The BOC maintained the overnight rate at 0.25%. The Bank Rate is correspondingly 0.5% and the deposit rate is 0.25%.
However, while the interest rate did not change further, the BOC did address the main culprit behind the previous decreases: the ongoing COVID-19 pandemic.
Each of the three interest rate changes in March was due in large part of the economic pressures of the novel coronavirus (COVID-19). In the April 15 announcement, the BOC issued its longest analysis of the ongoing pandemic to date.
Interest Rate Changes from March 2020 to April 2020
The 0.25% overnight rate, set on March 27, 2020, is what the BOC considers its “effective lower bound” — meaning they are not likely to decrease the rate any further. (In comparison, other countries such as the U.S. have set their interest rates to a range of 0% to 0.25%. Some, such as Switzerland, have even introduced negative interest rates.)
“The necessary efforts to contain the COVID-19 pandemic have caused a sudden and deep contraction in economic activity and employment worldwide,” the BOC stated.
In Canada, more than a million people lost their jobs in March.
“The employment decline in March was larger than in any of the three significant recessions experienced since 1980,” Statistics Canada reported.
By April, the BOC said, more than six million Canadians had applied for the Canadian Emergency Response Benefit (CERB).
Other impacts of the COVID-19 pandemic in Canada include lower oil prices, a depreciating dollar, and a “sharp repricing” of a wide range of assets.
COVID-19 Market Outlook
While the BOC said that the outlook is too uncertain at this point to provide a complete forecast, they did give analysis for what might come during recovery.
“The sudden halt in global activity will be followed by regional recoveries at different times, depending on the duration and severity of the outbreak in each region,” the BOC stated.
“This means that the global economic recovery, when it comes, could be protracted and uneven.”
BOC analysis suggested that the level of real activity was down 1% to 3% in the first quarter of 2020 and will be 15% to 30% lower in the second quarter, compared to 2019 Q4.
The BOC is also looking to support people and businesses when containment measures start to ease.
“The Bank has lowered its target for the overnight rate 150 basis points over the last three weeks, to its effective lower bound,” the BOC stated. “It has also conducted lending operations to financial institutions and asset purchases in core funding markets amounting to around $200 billion.”
The next challenge, the BOC said, will be managing increased demand for near-term financing, to which they announced new measures, such as a new Provincial Bond Purchase Program, to assist.
“All the Bank’s actions are aimed at helping to bridge the current period of containment and create the conditions for a sustainable recovery and achievement of the inflation target over time,” the BOC said.
The next scheduled BOC announcement is set for June 3, 2020.
Read the full April 15, 2020 announcement: https://www.bankofcanada.ca/2020/04/fad-press-release-2020-04-15/
Stay up-to-date with the latest COVID-19 announcements from Teranet in the COVID-19 Information Centre: https://www.teranet.ca/teranet-news-categories/covid-19-information/
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