It is customary for the Bank to provide a summary of the deliberations of Governing Council after each interest rate decision. This takes the form of an opening statement at the meetings when we publish an MPR, or a public speech the day after meetings for which there is no MPR.
Governing Council’s decision to cut interest rates on Friday, 13 March, 2020 took place in neither of these contexts. Given those unique circumstances, Governing Council is offering this statement of its reasoning from the decision of last Friday, March 13.
The macroeconomic situation has been evolving very rapidly as the COVID-19 coronavirus spreads around the world. In addition to the disruptions to production, travel and other economic activity, there has been a major drop in the world price of oil, a very important transmission channel for the Canadian economy. While Bank staff are hard at work to assess the macroeconomic consequences for the economy, there are clear and present downside risks to economic growth and inflation.
In this context, the Governor and Senior Deputy Governor have been in close contact with the heads of central banks in other countries, other key Canadian policy makers and the CEOs of Canada’s largest banks. All countries are facing similar circumstances, albeit to different degrees. This has resulted in a high degree of international policy coordination in recent weeks.
On the morning of March 13, the Governor and Senior Deputy Governor participated in a meeting with the Minister of Finance, the Deputy Minister of Finance and the Superintendent of Financial Institutions. At that time, the Bank outlined its intention to introduce to the market a Bankers’ Acceptance Purchase Facility to help relieve stresses in lending markets, particularly for small and medium-sized businesses. This would work in a complementary way to the government bond buyback program and the expansion of term repo operations that had been announced the preceding day, in an effort to promote good functioning of financial markets. At the same meeting, the Superintendent indicated that OSFI was prepared to announce a significant reduction in the domestic stability buffer to augment the lending capacity of Canadian banks; this followed similar moves in other major economies. Furthermore, the Minister of Finance stated his intention to introduce a significant fiscal stimulus in the following week. The Minister suggested that making a joint announcement of these moves by the Bank, OSFI and himself, later that same day, would be a powerful confidence-boosting statement for consumers, business and financial markets. Interest rates were not discussed at that meeting.
Later that day, the Governor and Senior Deputy Governor convened a meeting of Governing Council and briefed the other members about the impending announcements by other federal agencies. Although a revised staff projection was not yet available, it was evident to Governing Council that the disruptive impact of the coronavirus, along with the drop in oil prices, would in all likelihood justify some further easing of policy in the coming weeks. The economic consequences of the coronavirus itself will clearly have a major negative impact on the economy. Both the size and duration of this impact are unknown, but it was acknowledged that the effects should ultimately prove to be temporary. The impacts of the drop in oil prices are much more quantifiable and potentially more long-lasting. We recognized that maintaining the availability of credit to Canadian businesses and households is of the utmost importance in supporting the economy through a major temporary disruption of this nature. In this context, the discussion moved to the question of the appropriate timing of any further interest rate adjustments: waiting until our next fixed announcement date in mid-April, when we would also have a new staff projection; waiting for another move in global interest rates, thereby capitalizing on an international coordination effect, as we had done on March 4; or moving rates on Friday, thereby helping to create an even more powerful, domestically-coordinated policy package. After some discussion of the relative merits, Governing Council concluded that there could be considerable benefit to reducing interest rates immediately and significantly to complement the other measures supporting the functioning of credit markets.
Accordingly, Governing Council decided on March 13 to reduce interest rates by 50 basis points, effective March 16, and to issue a press release at the same time as the other announcements mentioned above. Governing Council stands ready to adjust policy further and to deploy other market tools, if required, to support economic growth and keep inflation on target.
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