A version of this blog appeared on CREA Stats.
In an emergency announcement on March 27, 2020, the Bank of Canada lowered its trend-setting overnight lending rate by half a percentage point from 0.75% to 0.25%. The Bank of Canada stated that 0.25% is the effective lower bound for their overnight lending rate. This was the third cut this month and brings the interest rate to levels not seen since the global financial crisis.
The decrease is aimed at dampening the economic shock caused by the spread of COVID-19, and is intended “to support the financial system in its central role of providing credit in the economy, and to lay the foundation for the economy’s return to normalcy.” Lowering interest rates eases the cost of borrowing by financial institutions, which in turn lowers the cost of borrowing for businesses and consumers.
Further to these goals, the Bank of Canada announced two new programs to increase the flow of funds to corporations and enhance the effectiveness of the other policy actions taken.
The first is to purchase commercial paper (short term bonds issued by corporations), which will directly help corporations struggling with cash flow.
The second is to purchase Government of Canada bonds in secondary markets, where individuals and companies trade existing government of Canada bonds. The Bank will be purchasing a minimum of $5 billion in these securities each week until “the economic recovery is well underway.”
As of March 27, the benchmark five-year lending rate was still 5.04%, down from 5.19% earlier in the month. All mortgage applicants must qualify for financing based on an interest rate no less than the benchmark five-year lending rate, even if the mortgage is for less than five years.
Canada’s major chartered banks are currently advertising five-year fixed mortgage interest rates of around 2.59%. Home buyers can often negotiate the interest rate for mortgage financing based on their creditworthiness and the degree to which they do other banking business with the mortgage lender.
The Government and Bank of Canada will continue to announce updated stimulus measures over the coming weeks as the economic impacts of these changes unfold.
The Bank of Canada’s next interest rate announcement will be on April 15, 2020 and will be accompanied by its updated outlook for the economy and inflation.