Bank of Canada maintains overnight lending rate and extends forward guidance
In a scheduled announcement on July 15,2020, the Bank of Canada maintained its overnight lending rate at 0.25%, which the Bank considers its effective lower bound. The Bank also noted that it will maintain the current level of policy rate until its inflation objective is achieved, and that it will continue its quantitative easing program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds.
The Bank stated that “after a sharp drop in the first half of 2020, global economic activity is picking up. This return to growth reflects the relaxation of necessary containment measures put in place to slow the spread of the coronavirus, combined with extraordinary fiscal and monetary policy support. As a result, financial conditions have improved. The prices of most commodities, including oil, have risen from very low levels.”
The Bank mentioned that they are facing many uncertainties in predicting future global and Canadian economic conditions, the biggest of which being the unknowable course of the COVID-19 virus itself. Reflecting this, the Bank’s July Monetary Policy Report (MPR) presents a central scenario for global and Canadian economic growth based on the following assumptions:
· there will not be a broad-based second wave of the pandemic in Canada or globally
· most large-scale containment measures will be gradually lifted
· the pandemic will have largely run its course by mid-2022, likely because of the widespread availability of a vaccine or effective treatment.
In the Bank’s central scenario, the global economy overall shrinks by about five per cent in 2020 and then grows by around five per cent on average in 2021 and 2022. The timing and pace of the recovery varies among regions and could be hampered by a resurgence of infections and the limited capacity of some countries to contain the virus or support their economies.
The Canadian economy is also starting to recover from extreme lows with economic activity in the second quarter estimated to have been 15% below its level at the end of 2019, the deepest decline in economic activity since the Great Depression. There are early signs that the reopening of businesses and pent-up demand are leading to an initial bounce-back, particularly in employment, motor vehicle sales and housing—suggesting that the Canadian economy hit bottom in April. As the economy moves from reopening to recuperation, the Bank states that it will continue to provide generous monetary policy support to help make borrowing more affordable for households and businesses until the recovery is well underway. To support the recovery and achieve the inflation objective, the Bank is prepared to provide further monetary stimulus as needed. In the central scenario, the Canadian economy shrinks by almost 8 percent this year, then grows by just over 5 percent in 2021 and almost 4 percent in 2022.
Tiff Macklem, the new Governor of the BoC, stated that this is not a normal recession and that the initial near-term growth that we have seen since April lows may give way to a slower, bumpier recuperation phase. He also reiterated that it would take a “long time” for the economy to return to late-2019 levels and that interest rates look to be low for “an extended period”.
All of this will result in the Bank keeping rates low for the foreseeable future.
As of July 15th, the benchmark five-year lending rate was 4.94%. All mortgage applicants must qualify for financing based on an interest rate no less than the benchmark five-year lending rate, even if the mortgage is for less than five years.
Canada's major chartered banks are currently advertising five-year fixed mortgage special interest rates of around 2.5%. Home buyers can often negotiate the interest rate for mortgage financing based on their creditworthiness and the degree to which they do other banking business with the mortgage lender.
The Bank of Canada’s next scheduled interest rate announcement will be on September 9th, 2020 and the next full update of the Bank’s outlook on the economy and inflation will be published in their Monetary Policy Report on October 28th.