Much has changed in just a month. On March 1, the Bank of Canada’s key lending rate was 1.75% and prime rate—the basis for all variable rates and lines of credit—was 3.95%.
Fast forward to today and the BoC has sliced 1.50%-points off its overnight rate, hammering prime rate to a decade low of 2.45%.
As COVID-19 spreads across the country and cripples the economy, Ottawa has responded with unprecedented support, including $200+ billion worth of financial relief for individuals and businesses.
Given the BoC's key lending rate is already just ¼-point above zero, and given Governor Stephen Poloz’s insistence that the bank isn’t considering negative rates, investors are betting on no rate change at the BoC’s next meeting on April 15.
Here’s more of what economists are saying about the Bank of Canada’s next move…
“The level of the policy interest rate is now back to the lows reached in the Global Financial Crisis. Notably, the statement accompanying the decision referred to 0.25% as the 'effective lower bound' – suggesting that any additional monetary easing will not be in the form of rate cuts.” - Source
“Poloz said the bank is ‘not contemplating’ negative rates and the financial system ‘will work better at this level.’…That begs the question—what will be the BoC's next move if more stimulus is needed? Given the scalability of the programs announced thus far, we think the next step would be to increase the pace of asset purchases, and potentially broaden their scope…The policies announced [to date] look like an appropriate response at this stage, but in this fast-changing crisis it's impossible to rule out the need to do more.”
“The policy response, in Canada and abroad, is monumental and in many ways wholly unprecedented… monetary and fiscal authorities likely aren’t done fighting, as they strive to bridge the gap to a post-virus economic recovery… We may be at the lower effective bound, but the toolbox is far from empty. To us, a logical next step could entail expanding/enlarging purchase programs to other fixed-income sectors or asset classes.” - Source
“The Bank of Canada joined the string of central banks throwing the kitchen sink at the economic downturn. In a move we've been expecting, the Bank of Canada cut rates another 50bps, bringing the target for the overnight rate down to 0.25%. The Bank noted that this was the effective lower bound, so further rate reductions to 0% or into negative territory seem ruled out.”
[1] The overnight rate is the interest rate the Bank of Canada uses to control inflation. It raises the overnight rate to slow inflation and vice versa. The overnight rate is the #1 determinant of prime rate, the basis for variable-rate mortgages.
[2] Prime rate is tracked by the Bank of Canada. It equals the typical (mode average) prime rate of the six largest Canadian banks.
[3] As of the date of this publication, as tracked by RateSpy.com
[4] The neutral rate is the theoretical Bank of Canada overnight rate that neither boosts nor restrains economic growth. It’s updated every April.
[5] This is the implied number of Bank of Canada rate changes based on prices of overnight index swaps (OIS). OIS are bond market derivatives that traders use to bet on the direction of interest rates.
[6] This figure equals the year-end overnight rate forecasts from major economists (as tracked by Bloomberg) plus a 220-basis point spread, which is the current spread between prime rate and the overnight rate.
[7] This figure equals the year-end 5-year Government of Canada bond yield forecasts from major economists (as estimated from 2- and 10-year bond yield forecasts, as tracked by Bloomberg) plus a 150-basis-point spread, which is the typical spread between conventional discounted 5-year fixed rates and the 5-year government bond yield.