Bank of Canada holds rate steady, saying COVID-19 economic impact 'appears to have peaked'

The Bank of Canada held its benchmark interest rate steady at 0.25 per cent on Wednesday and said it thinks the economic impact of COVID-19 on the world's economy "appears to have peaked."

Canada's central bank has dropped its rate dramatically since the pandemic began, cutting its rate from 1.75 per cent in late February to 0.25 per cent barely a month later.

The bank's rate influences the rates that Canadian borrowers and savers get from their banks on things like mortgagesand bank accounts. The central bank cut its rate in an attempt to encourage borrowing and investing to stimulate the economy, but those rate cuts weren't the only thing it did to try to buttress the economy from the unprecedented hit of COVID-19.

The bank also started a number of bond and debt-buying programsin order to make sure there is enough cash in the system.

It announced on Wednesday it will tinker withtwo of them because things are starting to look up, but it is still buying up government bonds at a record-setting pace in order to make sure banks have enough cash on hand to lend to credit worthy borrowers.

"The Bank's programs to improve market function are having their intended effect," the bank said. "After significant strains in March, short-term funding conditions have improved. Therefore, the Bank is reducing the frequency of its term repooperations to once per week, and its program to purchase bankers' acceptances to bi-weekly operations."

Bond-buying

Bank of Montreal economist Benjamin Reitzes noted that "both of these operations have seen much less take-up (or none at all) of late."

"The bank stands ready to adjust these programs if market conditions warrant," the central bank said. "Meanwhile, its other programs to purchase federal, provincial, and corporate debt are continuing at their present frequency and scope."

In barely two months, the feverish pace of bond buying to buttress the economy has ballooned the bank's balance sheet by $125 billion, Toronto-Dominion Bank economist James Orlando calculated.

Slowing the frequency of new purchases is likely to bring that number down a little, but stimulus measures will remain in place for a while yet,CIBC economist Royce Mendes says.

"The bank had accumulated a large swath of short-term securities on its balance sheet, but now that those programs can wind down, the composition of the bank's balance sheet is likely to change."

Worst case scenario avoided for now

The reason for the bank's cautious optimism is the bank's belief that Canada has avoided the worst-case economic scenario that it painted in April.

The central bank now expects GDP to decline between 10 and 20 per cent compared with the fourth quarter of 2019, less than the 15 to 30 per cent decline forecastin April.

"Massive policy responses in advanced economies have helped to replace lost income and cushion the effect of economic shutdowns," the bank said in explaining its rate decision. "Financial conditions have improved, and commodity prices have risen in recent weeks after falling sharply earlier this year.

The rate decision means that Canadians with variable rate mortgages shouldn't expect any changes to their lending rate any time soon.

Mortgage rates

"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.caand president of mortgage brokerage CanWise Financial.

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

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Wednesday's decision is the last one under the leadership of Stephen Poloz. Tiff Macklem was named to replace him. Macklem "participated as an observer in governing council's deliberations for this policy interest rate decision and endorses the rate decision and measures announced in this press release," the bank said Tuesday.