BoC held the interest rate at 0.25 percent
Nicole McKnight
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The Bank of Canada held the policy rate to .25% today. This hold was widely expected after the BoC emergency rate cut on March 27, when Stephen Poloz communicated that .25% is the effective lower bound.
All 12 economists on Finder’s Bank of Canada interest rate forecast panel accurately forecasted the decision. And all but one, Professor of Economics at Concordia University, Moshe Lander, thought the Bank should hold the rate.
“If the Bank wants to challenge its theory that 0.25 percent is the effective lower bound, it can take an unconventional move to lower the target overnight rate by, say, 10 basis points, rather than the usual 25 basis points and see how markets react,” he said.
The panel is divided as to whether the rate should go below 0.25% in future. 58% say the rate should go no lower, 33% are unsure and 8% disagree.
Associate Director of Economic Forecasting for the Conference Board of Canada, Alicia MacDonald, like the majority of the panel, believes the rate should go no lower.
“As interest rates approach zero, further rate cuts have a less stimulative impact…when weighing the small stimulative benefit against the feasible large cost to the financial sector, there is not a strong case for further cuts to the overnight rate at this point,” she said.
Still, a third of panellists, including Senior Economist at TD Bank, Brian DePratto; Deputy Chief Economist at Scotiabank, Brett House; Economics Professor at the University of Toronto, Angelino Melino; and Associate Professor of Economics at the University of Calgary, Trevor Tombe; are potentially open to the idea of negative rates.
DePratto said negative rates may need to be considered even though it’s not clear how effective they would be.
“It is logical that other tools be ‘taken off the shelf’ before moving into negative territory. But they are clearly still part of the toolkit – and in the event that things get much worse, no tool should be ruled out entirely,” he said.
When asked if an additional stimulus package will be needed to combat the increasingly devastating economic fallout of COVID-19, 89% of the panelists who responded said yes. The majority (five of eight), said around $100 billion extra would be needed.
Today the Bank of Canada responded to calls for more economic stimulus by committing to continue to purchase at least $5 billion in Government of Canada securities per week in the secondary market. The Bank also announced a new Provincial Bond Purchase Program of up to $50 billion and a new Corporate Bond Purchase Program of up to $10 billion.
Laurentian Bank Securities, Chief Economist, Sebastien Lavoie, predicted the Bank would move into purchasing corporate and provincial bonds and that the BoC could ultimately end up purchasing more than $500 billion in different assets.
“A broader QE program going beyond the purchase of federal bonds and including corporate and provincial bonds is likely to be more effective given the challenging market liquidity. A more severe Covid-19 scenario could lead to a total purchase of $500B+ in different assets.”
Scotiabank’s Derek Holt, TD’s DePratto and Laurentian Bank’s Lavoie, said they’d like to see more targeted industry assistance in the next package. Lavoie suggested help could come in the form of a GST remittances break and a 0% GST rate to provide cash flow relief and support an eventual recovery.
Other suggested measures included a Basic Income Guarantee, supply boosting measures, further credit support for business and more support for low to medium-income households.
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