Bank of Canada Cuts Rates in Coordinated Stimulus Package

(Bloomberg) -- The Bank of Canada cut interest rates by half a percentage point to buffer the nation’s economy against the double whammy of the coronavirus and tanking oil prices.

The Ottawa-based central bank lowered its policy rate in an emergency move to 0.75% and said it “stands ready” to act again if needed. Governor Stephen Poloz, in a joint press conference Friday afternoon with Finance Minister Bill Morneau, also announced a new facility to acquire money market instruments used by small- and medium-size businesses “at a time when they may have increased funding needs and credit conditions are tightening.”

“It is clear that the spread of the coronavirus is having serious consequences for Canadian families, and for Canada’s economy,” the central bank said in a statement. “In addition, lower prices for oil, even since our last scheduled rate decision on March 4, will weigh heavily on the economy, particularly in energy intensive regions.”

This marks the first emergency rate cut by the country’s central bank since the 2008-2009 financial crisis and is part of a coordinated government-wide response to a slowdown that threatens to drive the nation’s economy into a recession. Morneau announced he would deliver a fiscal stimulus package next week, promising to do “whatever it takes” to keep the economy afloat.

Friday’s measures emphasized the need to ensure funding markets remain liquid for businesses at a time of market stress. Morneau introduced an additional C$10 billion ($7.1 billion) in new funding for the country’s two business financing agencies -- the Business Development Bank of Canada and Export Development Canada.

Jeremy Rudin, head of Canada’s banking regulator, said he would lower capital adequacy buffers for the nation’s banks, a measure that could generate as much as C$300 billion in additional lending capacity.

The Bank of Canada will begin purchasing so-called Bankers’ Acceptance securities -- a money market instrument widely used by small and medium-sized corporate borrowers that may not have direct access to primary funding because of their size and credit ratings.

“Targeting each vulnerable sector of the economy -- small and medium businesses, banks, households -- is strong,” said Ian Pollick, head of rates strategy at CIBC in Toronto. “They are serious about coming out fast and furious.”

Market moves were muted with the Canadian dollar hardly budging on the news. It was trading at C$1.3918 per U.S. dollar at 3:48 p.m. Toronto time, little changed from Thursday.

“Currencies no longer care about rate differentials,” said Simon Harvey, Forex Market Analyst at Monex Canada. “Investors are flocking to liquid dollars.”

The growing number of coronavirus cases globally, the shock to oil prices and volatility in financial markets have prompted speculation Canada will undergo an economic contraction in the second and third quarters of 2020.

The emergency rate cut was not entirely unexpected on the heels of the Bank of Canada’s March meeting, where it lowered interest rates by half a percentage point for the first time in more than four years. Still, the response represents a dramatic move in an effort to keep the economy running amid rapidly deteriorating financial conditions.

“The Bank of Canada is taking concerted action to support the Canadian economy during this period of economic stress,” Poloz said. “The Bank’s Governing Council stands ready to do what is required to support economic growth and keep inflation on target, and we will continue to ensure that the Canadian financial system has sufficient liquidity.”

--With assistance from Kait Bolongaro and Shelly Hagan.

To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net;Erik Hertzberg in Ottawa at eschmitzhert@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier, Stephen Wicary

©2020 Bloomberg L.P.