Bank of Canada keeps key interest rate unchanged at 0.25 pct

The Bank of Canada maintained its policy rate at 0.25 percent today. It repeated in its opening statement that this is the “effective lower bound” for the policy rate. The central bank also maintained its asset purchase programs. In the past two months, the BoC’s balance sheet has risen CAD 339 billion to CAD 464 billion. This rise has mainly been because of purchases of government of Canada securities and securities purchased under repo agreements. These measures, along with purchases of provincial and corporate debt have eased borrowing rates and improved liquidity.

The short-term funding facilities’ success led to the Bank to reduce the frequency of its term repo operations to once a week and its bankers’ acceptance purchases to bi-weekly.

The Bank’s communique underlined the severe economic effect of COVID-19 and related shutdowns. It forecasts that the “level of real GDP in the second quarter will possibly show a further fall of 10 to 20 percent”. This is a considerable fall in economic output, but not as bad as the most severe scenario presented in the Bank’s April Monetary Policy Report, which envisioned a 30 percent fall in activity. The Bank of Canada also stated that the economic shock “appears to have peaked”, but hedged this by stressing that the economic rebound is highly uncertain.

“Overall, the announcement today supported the Bank's existing policy actions. It also maintained its openness to push harder on current policy efforts, such as asset purchases, should the economy experience any hiccups during recovery. The current shock will require a nimble hand and the Bank of Canada has maintained its commitment to do everything it can to help the economy get back to normal as fast as it can”, said TD Economics in a research report.