Bank of Canada Maintains Overnight Rate at 0.25 Per Cent; Unveils New Credit Support Programs

The Bank of Canada (BoC) chose to maintain its overnight lending rate at 0.25 per cent in their April announcement, noting this rate could be considered its “effective lower bound” or that no further rate cuts are planned. This rate hold follows three cuts in March 2020: one at the start of March, followed by an unscheduled cut mid-March and another emergency cut in response to COVID-19 at the end of the month that brought the rate to 0.25 per cent. The current 0.25 per cent rate is the lowest that the BOC has dropped it’s overnight rate since 2010.

Instead, as the effects of COVID-19 are felt widely across the economy, the BoC unveiled two new measures to purchase provincial and corporate bonds in an effort to support credit markets and the financial system at large.

No Immediate Impact on Mortgage Borrowers

Generally speaking, BoC rate changes have the most direct impact on variable rate borrowers, who can expect to see a drop in monthly payments or a lower interest payment if rates drop. This is because the BoC rate, formally known as the Overnight Lending Rate, is used by banks to set their own variable mortgage and credit rates.

With no change in the BoC rate, mortgage borrowers can expect their mortgage payments to remain steady. Further, the BoC’s decision to clarify current rates as their lower threshold is a clear indicator that mortgage borrowers with variable rates should not expect any changes to their monthly payments until the economy stabilizes.

Fixed rate borrowers on the other hand, will see no immediate impact on their monthly costs unless they are looking to renew or refinance an existing mortgage, in which case they can take advantage of the current low rate environment.

New Bond Programs Aimed At Bolstering Economic Recovery

In addition to unprecedented job losses and widespread business closures in the face of COVID-19, Canadian financial markets were further impacted by the drop in commodity prices and a dollar that has depreciated since January.

Although COVID-19 caused a “sudden and deep contraction in economic activity and employment worldwide”, the BoC noted that economic recovery would be regionally-driven, likely to occur at different times, and bound by the “duration and severity of the outbreak” in each area. The Bank noted that while the uncertainty of the current environment doesn’t allow for a complete forecast, an analysis of alternative scenarios shows that real activity declined between 1 and 3 per cent in Q1 of 2020, and is expected to be 15-30 per cent lower in Q2 vs. Q4 of 2019. The extent to which these scenarios will play out will depend on “how long the containment measures remain in place, and how households and firms adapt” said BoC governor Stephen Poloz during his press conference.

As such, to further support individuals and businesses across Canada and ease pressure on Canadian borrowers, the BoC also announced a new Provincial Bond Purchase Program of up to $50 billion and a new Corporate Bond Purchase program to acquire up to $10 billion investment-grade corporate bonds in the open market. Both measures are aimed at creating “conditions for a sustainable recovery and achievement of the inflation target over time.” More information about the new measures announced by the BoC can be found here.