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Canadian and U.S. central banks respond to Covid-19

  • First National Financial LP

On Friday afternoon March 13, 2020, Canadian policymakers from the Department of Finance, the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) announced a coordinated response to alleviate economic stress caused by the COVID-19 pandemic.

The emergency measures, which are intended to ensure that the Canadian financial system has sufficient liquidity, included:

  • a 50-basis point drop in the Bank of Canada’s overnight rate to ¾ percent, effective today (Monday, March 16, 2020)
  • a reduction in the Domestic Stability Buffer requirement for systemically important Canadian banks, a move that is intended to support in excess of $300 billion of additional lending capacity to the economy during the period of disruption related to COVID-19
  • establishment of the Business Credit Availability Program to provide more than $10 billion of support to businesses through the Business Development Bank of Canada and Export Development Canada
  • creation of a new Bankers’ Acceptance Purchase Facility to support the funding market for small- and medium-size businesses

During its statement, the Bank of Canada indicated that the spread of the coronavirus is having serious consequences for Canadian families, and for Canada’s economy. Lower prices for oil, even since the central bank’s last scheduled rate decision on March 4, “will weigh heavily on the economy, particularly in energy-intensive regions.”

These moves follow a Bank of Canada announcement on Thursday March 12, 2020 that it was broadening the scope of the Government of Canada bond buyback program to add market liquidity and support price discovery. The Bank also committed to proactively support interbank funding by temporarily adding new Term Repo operations with terms of six and 12 months, in addition to its regular one-month and three-month Term Repo operations.

As part of these coordinated moves, OSFI announced it will suspend all consultations on regulatory matters, including on the proposed new minimum qualifying rate for uninsured mortgages until conditions stabilize. The government also suspended its previous decision to introduce a new minimum qualifying rate for insured mortgages until further notice.

U.S. Fed Rate

Separately, yesterday (Sunday March 15) at 5pm Eastern, the United States Federal Reserve issued an updated statement in which its Open Market Committee announced a decision to lower the target range for its Federal Funds Rate to 0 to ¼ percent.

The U.S. Fed also issued a statement in which it said, among other things:

  • the coronavirus outbreak has disrupted economic activity in many countries, including the United States
  • global financial conditions have also been significantly affected
  • the effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook
  • it is prepared to use its full range of tools to support the flow of credit to U.S. households and businesses
  • ·over the coming months, it will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion
  • it will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and its Open Market Desk has recently expanded its overnight and term repurchase agreement operations
  • the energy sector has come under stress with overall inflation and inflation for items other than food and energy running below 2 percent on a 12-month basis
  • market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed

The Open Markets Committee expects to maintain its new target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

Looking Ahead

The Bank of Canada will provide a full update of its economic outlook on April 15, 2020 and noted that as the current situation evolves, “Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

Should you have any questions about these very significant changes, please contact your First National advisor.