Bank of Canada holds rate steady but scales back some COVID-19 stimulus

The Bank of Canada held its benchmark interest rate steady at 0.25 per cent on Wednesday and said it thinks the economic impact of COVID-19 on the world’s economy “appears to have peaked.”

Canada’s central bank has cut its rate dramatically in recent months to deal with the ongoing global pandemic, settling its benchmark interest rate at 0.25 per cent.

The bank’s rate influences the rates that Canadian borrowers and savers get from their banks on things like mortgages and bank accounts. The central bank cut its rate in an attempt to encourage borrowing and investing to stimulate the economy, but those rate cuts weren’t the only thing it did to try to buttress the economy from the unprecedented hit of COVID-19.

The bank also started a number of bond and debt-buying programs in order to make sure there is enough cash in the system. 

On Wednesday, the bank said those programs have had their desired effect, which is why they have decided to scale them back a little.

“The Bank’s programs to improve market function are having their intended effect,” the bank said. “After significant strains in March, short-term funding conditions have improved. Therefore, the Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations.”

The “term repo” program is one that sees the bank buy up government bonds. The “bankers’ acceptances” program sees the central bank buy up short-term debt from banks. Both are aimed at making sure there is enough liquidity in Canada’s financial system to make sure banks can lend cash to credit-worthy businesses that need it.

“The Bank stands ready to adjust these programs if market conditions warrant,” the central bank said. “Meanwhile, its other programs to purchase federal, provincial, and corporate debt are continuing at their present frequency and scope.

The reason for the bank’s cautious optimism is the bank’s belief that Canada has avoided the worst-case economic scenario painted that it painted in April.

The central bank now expects GDP to decline between 10 and 20 per cent compared with the fourth quarter of 2019, down from the 15 to 30 per cent decline forecast in April.

Wednesday’s decision is the last one under the leadership of Stephen Poloz. Tiff Macklem was named to replace him. Macklem “participated as an observer in Governing Council’s deliberations for this policy interest rate decision and endorses the rate decision and measures announced in this press release,” the bank said Tuesday.

Read more at CBC.ca

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