Bank of Canada says COVID-19 impact has peaked, holds interest rate at 0.25 per cent

Yahoo Finance Canada
(Getty Images)
(Getty Images)

The Bank of Canada held its key interest rate steady at 0.25 per cent on Wednesday.

It was Stephen Poloz’s final decision as governor, paving the way for new governor Tiff Macklem to navigate Canada’s central bank through the COVID-19 pandemic.

Scroll to continue with content
Ad

“Incoming data confirm the severe impact of the COVID-19 pandemic on the global economy,” said the Bank of Canada in a release.

“This impact appears to have peaked, although uncertainty about how the recovery will unfold remains high.”

The decision to stand pat was expected, since the bank’s benchmark rate has already been cut 150 bps to what the bank calls its effective lower bound, through a string of cuts to help cushion the economy from the effects of the coronavirus.

The Bank of Canada pared back its forecast for economic decline in the second quarter, compared to April when it saw GDP falling 15 per cent to 30 per cent.

“The level of real GDP in the second quarter will likely show a further decline of 10-20 percent, as continued shutdowns and sharply lower investment in the energy sector take a further toll on output,” said the Bank of Canada.

“Decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery.”

The Bank of Canada says it will wind down some of its asset purchase programs, but stands ready to adjust if conditions warrant.

Macklem participated in today’s decision, but only as an observer. Today is his first day as governor. The next decision is July 15th and will include his outlook on the economy.

Stephen Brown, senior Canada economist at Capital Economics thinks Macklem will expand asset purchases.

“With corporate borrowing spreads still very elevated compared to last year, we think new governor Tiff Macklem will opt to expand the Bank’s corporate bond purchase program, or announce a funding for lending scheme, in the coming months,” said Brown.

The Canadian dollar rallied in the moments after the Bank of Canada’s announcement, but it was strong beforehand.

Don Curren, market strategist and content editor at Cambridge Global Payments, says there’s more to the strength than the Bank of Canada’s actions.

“The Canadian dollar (CADUSD=X) has been markedly strong against its US counterpart in recent trading, but its robust performance may be more attributable to an increased appetite for risk among global investors rather than any specifically Canadian factors,” said Curren in a note.

Until the economy fully gets back on its feet, the absence of rate hikes means variable mortgage rates will remain low.

“The historically low mortgage rates currently in the market are here to stay until the economy approaches the level it was at before the pandemic started,” said James Laird, co-founder of Ratehub.ca.

This means that anyone with a variable rate can expect prime to remain unchanged. Fixed rates will stay near historic lows.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

Download the Yahoo Finance app, available for Apple and Android.

What to read next