On Friday (March 27), the Bank of Canada initiated an emergency key rate cut of 50 bps to 0.25% in an attempt to defend the economy against the impacts of COVID-19. Additionally, the Bank of Canada will expand its balance sheet through purchases of Government of Canada securities to the tune of $5 billion per week, minimum.
In a press release from the Bank of Canada, Stephen Poloz says, “The intent of our decision today is to support the financial system in its central role of providing credit in the economy, and to lay the foundation for the economy’s return to normalcy.”
The Bank of Canada key rate has not been at these levels since April 2009.
Between COVID-19 and the energy sector, the Canadian economy is being hit from all sides. With the price of oil floating just above $20 a barrel and Western Canadian Select at $5.00, Canada is facing big challenges.
Some economists wonder if a cut to zero is inevitable. JP Gervais, chief economist with Farm Credit Canada, is not so sure a move to zero would be considered a positive, “the key rate is the target for the overnight rate and if you look at the actual overnight rate, it will often times be slightly under the target. So dropping the target to zero would open up uncharted territory with the actual overnight being under zero from time to time.”
During a press conference, Poloz was asked about negative rates and he mentioned that negative rates would have negative consequences.
The Canadian dollar traded at $0.716 at the time of article posting.
Farmers should be paying attention to whether financial institutions cut their prime rates.