Canada cut rates for the third time in a month on Friday, if you can believe it.
The 50bps reduction brings the overnight rate to just 0.25%. “This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic”, the BOC said, in a statement accompanying the emergency move.
For those keeping score, that is 150bps from the BOC this month (details of previous two cuts are here and here).
“The spread of COVID-19 is having serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices”, the statement goes on to say, calling the bank’s actions complimentary to “decisive fiscal policy action to support individuals and businesses”.
In a testament to the notion that policymakers are worried about potentially long-lasting damage, the BOC says its efforts are also aimed at “minimiz[ing] any permanent damage to the structure of the economy”. (That’s kind of unnerving, even as it’s meant to allay worries.)
The loonie has, of course, come under immense pressure of late amid plunging crude prices. Canadian equities suffered a grievous hit in March along with their global counterparts although, like US equities, surged during a truly absurd three-day run this week.
“Canada is heavily exposed to the global downturn given nearly a third of economic activity is tied to global trade while the plunge in commodity prices compounds the problem”, ING said, in an e-mailed note. “This poses huge risks for employment and investment, particularly in the oil and gas industries”.
The BOC went further than simply cutting rates to the lower bound on Friday. They also announced the broad contours of QE.
“To address strains in the Government of Canada debt market and to enhance the effectiveness of all other actions taken so far, the Bank will begin acquiring Government of Canada securities in the secondary market”, the statement declares.
This buying will be $5 billion per week “at minimum” and will take place across the curve. The program is theoretically open-ended and will continue “until the economic recovery is well underway”.
“The Bank’s balance sheet will expand as a result of these purchases”, the BOC says, in a hilariously dry remark.
In addition, Canada is launching a commercial paper facility to help ensure short-term funding markets don’t freeze for corporate borrowers.
This comes on the heels of similar announcements from Australia and New Zealand, which both launched QE programs this month (see here and here).
Earlier Friday, the RBI cut rates 75bps, trimmed the cash reserve ratio for banks by 100bps and rolled out $50 billion in liquidity measures, all in a bid to cushion the economy amid a nationwide lockdown affecting 1.3 billion people.
“A war effort has to be mounted”, RBI Governor Shaktikanta Das said. “It is worthwhile to remember tough times don’t last, only tough people and tough institutions do”.
It all comes down to how many asymptomatic and mild cases are out there going undetected. If a lot, then we should be fine. If not many, we should prepare for a very long and hard fight.
I remain very concerned about the fragility of the EU and emerging markets where crushing debt loads are not so easily hand-waved away without serious currency, sovereign, and geopolitical consequences.
We may survive our refuge in Helm’s Deep, but the battle for Middle Earth has yet to begin.
For my life, I do not understand why you have to do this stupid video thing! Everywhere anywhere it seems smart these days. Don’t get it. It has nothing to do with anything.