First National Financial LP

Bank of Canada lowers rates again and launches two debt market support programs

  • First National Financial LP

This morning, the Bank of Canada lowered its target for the overnight rate by 50 basis points to ¼ percent. This follows a 50-basis point reduction that took effect March 16, 2020 and a 50-basis point reduction on March 4, 2020 and brings the policy rate to its lowest level since the global financial crisis over a decade ago.

In making its second unscheduled rate decision in just two weeks, the Bank noted that the spread of COVID-19 is having “serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices” and requires “decisive fiscal policy action” to support individuals and businesses and to minimize permanent damage to the structure of the economy.

The Bank described its current policy rate as its “effective lower bound” and suggested its interest rate setting “cushions the impact of the shocks” to the economy “by easing the cost of borrowing.”

In is announcement, the Bank reiterated that its efforts to date have been primarily focused on ensuring the availability of credit by providing liquidity to help markets continue to function.  Furthermore, it noted that the intent of its decision is partly “to lay the foundation for the economy’s return to normalcy.”

To promote credit availability, the Bank has expanded its term repo facilities and is engaged in:

  • Government of Canada bond buybacks and switches
  • purchases of Canada Mortgage Bonds and banker’s acceptances (see below)
  • purchases of provincial money market instruments (see below)

It pledged to extend or augment all of these additional measures as needed.

New Programs

The Bank’s announcement highlighted the creation of two new programs to complement the impact of lower rates:

  1. A Commercial Paper Purchase Program (CPPP) intended to alleviate strains in short-term funding markets and preserve a key source of funding for businesses
  2. The acquisition of Government of Canada securities in the secondary market beginning with a minimum purchase of $5 billion per week, across the yield curve. The program will be adjusted as conditions warrant and will continue until the economic recovery is well underway

The Bank indicated that it will update its outlook in mid-April and said its Governing Council “stands ready to take further action as required to support the Canadian economy and financial system and to keep inflation on target.”

Insured Mortgage Purchase Program Revision

In separate news reported yesterday (March 26, 2020), the Government of Canada launched a revised Insured Mortgage Purchase Program (IMPP). Under this program, the government is prepared to purchase up to $150 billion of insured mortgage pools through CMHC – up from $50 billion previously. This action will provide stable funding to mortgage lenders in order to ensure continued lending to Canadians.

Canada Mortgage Bond Program

In addition to the access to liquidity provided through the IMPP, yesterday CMHC announced it is ready to expand issuance of Canada Mortgage Bonds to a total annual amount of up to $60 billion. The national housing agency said this additional issuance would depend on market conditions and investor demand.

As you know, Canada Mortgage Bonds (CMBs) are used by financial institutions to finance their mortgage lending. On March 24, 2020, the Bank of Canada noted that the functioning of this market was becoming impaired, which provided the catalyst for this CMB purchasing program. The BoC noted that this action “provides the means for financial institutions to renew mortgages” and supports the flow of credit more generally.

Other Supports

Over the past few days, the Bank of Canada also introduced or established:

  • the Bankers’ Acceptance Purchase Facility. The Bankers Acceptance market is one of Canada’s core funding markets and a key source of financing for small- and medium-size corporate borrowers.
  • a new initiative called Provincial Money Market Purchase (PMMP) program to support the liquidity and efficiency of provincial government funding markets
  • a new Standing Term Liquidity Facility to help financial institutions better manage their liquidity risks and continue to provide customers with access to credit. To access the STLF, financial institutions can pledge a broader set of collateral, including mortgages, which significantly increases funding capacity