Bank of Canada battles coronavirus fallout with third rate cut

In an emergency announcement today, Canada’s central bank cut its market-shaping overnight rate by 50 basis points to 0.25 percent in response to the coronavirus pandemic’s dramatic impact on the Canadian economy and financial system.

This move was the third rate cut in the span of a month and the second emergency announcement the Bank of Canada has made within two weeks. While the cut is technically viewed as an “emergency” measure since it falls outside the Bank’s regularly scheduled rate announcements, it came as no surprise to economists who had widely anticipated the move.

Just earlier this week, the RBC Economics team noted that while the Bank of Canada had been quick to respond to the coronavirus pandemic, additional measures would be necessary and a further rate cut was all but inevitable.

Today’s cut brings the overnight rate to a level that matches the depths of the financial crisis of 2008-2009, down from 1.25 percent after just a few short weeks. While the Bank is working on a number of initiatives to support the Canadian economy during these volatile times, experts believe this will be its final rate cut in response to the pandemic and it will stop short of slashing the rate into negative territory.

“[Bank of Canada] Governor Poloz views this as the effective lower bound and is not likely to employ negative rates that the Bank thinks are harmful to financial markets,” wrote Oxford Economics’ Tony Stillo.

“This extraordinary monetary stimulus, in tandem with a still growing number of fiscal measures, are an absolute necessity to help offset the worst-case impacts from the pandemic shock on the economy,” he added.

The Canadian housing market is expected to see a significant slowdown in activity in the coming months with the first signs of the pandemic’s impact anticipated to be visible in the March sales data from markets across the country. That being said, the diminished number of those who do purchase homes during this time will likely see historically low mortgage rates being offered by lenders.

“Think of the [Bank of Canada’s] Overnight Lending Rate as a benchmark – it is a basis used by consumer lenders, such as TD, RBC, etc. when setting their Prime Rate-priced products. This means whatever the BoC does will have a direct impact on variable-rate products, such as variable mortgages and lines of credit,” wrote Zoocasa’s Managing Editor Penelope Graham in a blog post.

“As a result, those with variable-rate mortgages will see either their monthly payments drop in tandem, or more of their payment going toward their principal debt and less towards interest.”