COVID-19: Bank of Canada Actions to Support the Economy and Financial System - The Industry Spread

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Bank of Canada

COVID-19: Bank of Canada Actions to Support the Economy and Financial System

March 26, 2020

Learn about the economic impact of the COVID-19 pandemic and the Bank of Canada actions to support the Canadian economy and financial system.

COVID-19 and the economy

The COVID-19 pandemic represents a serious health threat to people around the world, and a significant disruption to daily life. It is having a major impact on the global and Canadian economies. Every sector of the Canadian economy will be affected. Some sectors, such as the energy, travel and hospitality and service industries, are being particularly hard hit.

The public health actions needed to contain the spread of the virus, such as school closures, states of emergency, and social distancing measures, while necessary, are themselves going to significantly impact economic activity.

However, it’s important to underscore that while the impact is large, it will be temporary. Authorities around the world have taken bold and necessary measures to contain the spread of the virus and to support people and businesses through a very challenging time.

What the Bank is doing

Our immediate goal is to help Canadians bridge this difficult period by making credit affordable and available. As many economic activities are temporarily shut down, companies rely on credit to continue to pay their employees, and households need credit to continue spending to meet their basic needs. But they may be unable to borrow if financial turmoil curtails lending activity.

The central bank must therefore intervene to prevent a sudden contraction of credit when credit is most needed. If Canadians can’t borrow to weather this economic storm, the impact on the economy would be worse, the recovery will take longer and there will be long-lasting damage to Canada’s productive capacity.

Achieving our primary mandate of keeping inflation close to target requires us to stabilize the economy and employment first. In normal times, we can achieve our inflation objective by setting the policy interest rate at the appropriate level. However, during major disruptions to the economy and financial markets such as those we are experiencing with COVID-19, we need to take more comprehensive measures to ensure that the financial system continues to play its role of providing credit where it is needed.

For these reasons, the Bank of Canada is acting in several ways to support the economy and financial system and stands ready to take any and all actions that we can to protect the well-being of Canadians during this difficult time.

Monetary policy

We have lowered interest rates to support economic activity and keep inflation low and stable. These moves work by lowering payments on existing and new loans throughout the economy. The Bank has additional tools in its monetary policy toolkit that can be used to further support the economy and achieve the inflation target.

See related announcements

Support to key financial markets

We are intervening to support key financial markets to ensure they continue to function properly. These interventions include an expanded buyback program for Government of Canada bonds and expanded purchases of Canada Mortgage Bonds (CMBs).

In times of market turmoil, financial institutions may be reluctant to act in their normal role as market makers for bonds and other financial assets. Market makers hold inventories of securities and quote prices at which they will buy and sell—activities that may become prohibitively risky when the prices of these securities are fluctuating widely. Buyers and sellers may then find it difficult to trade—in other words, the market becomes illiquid.

This is particularly problematic in the case of friction in the market for Government of Canada bonds, which are often held as the safest Canadian-dollar asset. Those holding a bond may find it difficult to sell it to obtain cash, while those wishing to buy a bond for its safety may be unable to obtain it. Given the central role of Government of Canada bonds, including as a benchmark for other interest rates, such market illiquidity can have pervasive effects through the financial system. As the liquidity of markets for certain maturities of Government of Canada bonds has been diminished through this period, the Bank of Canada, as fiscal agent of the Government, has expanded a program of buybacks, whereby it offers to purchase less-widely-traded bond issues from investors and sells more-widely-traded ones in return.

Canada Mortgage Bonds (CMBs) are another key financial market in Canada. Financial institutions use CMBs to finance their mortgage lending to Canadian homeowners. The functioning of this market was also becoming impaired amid broader market turmoil. In response, the Bank of Canada introduced a program of purchasing CMBs. This helps provide the means for financial institutions to renew mortgages during this period, as well as supports the flow of credit more generally.

We also launched the Bankers’ Acceptance Purchase Facility (BAPF). The Bankers Acceptance market is one of Canada’s core funding markets and a key source of financing for small- and medium-size corporate borrowers.

In addition, the Bank announced a new program to support the liquidity and efficiency of provincial government funding markets. The Provincial Money Market Purchase (PMMP) program will support a liquid and well-functioning market for short-term provincial borrowing.

See related announcements

Liquidity support for financial institutions

Given that the size and duration of the impact of COVID-19 are highly uncertain, credit markets may become impaired. This is both because financial institutions face difficulties in obtaining funding for their lending as well as because they may become reluctant to lend in fear that many borrowers may be unable to pay. The problem of funding is partly system-wide and partly specific to individual institutions: in the context of market turmoil there is a generalized desire for safer assets, but even if that demand is satisfied in aggregate, some financial institutions may have difficulty obtaining funding.

Our interventions have thus far included ready access to funding by lengthening the term over which we lend money to banks, widening the collateral we accept to provide lending, and expanding the list of eligible institutions that can access our lending. Widening accepted collateral helps in two ways: it enables institutions holding that collateral to obtain financing so they can continue other lending, and it supports the functioning of markets for those assets accepted as collateral. As the economic impact of COVID-19 grows and businesses and individuals seek more funds from their lines of credit, the Bank will take the necessary measures to ensure credit continues to flow.

At the same time as we are providing liquidity to the financial system as a whole, we are also prepared to help viable financial institutions who face challenges in these choppy markets. We have established a new Standing Term Liquidity Facility (STLF) to help banks better manage their liquidity risks and continue to provide their customers with access to credit. To access the STLF, financial institutions can pledge a broader set of collateral, including mortgages, which significantly increases their funding capacity. The Bank of Canada encourages the use of the STLF by banks to help them continue to provide loans to households and businesses when they need it most.

See related announcements

Our actions work together

The actions we are taking are mutually reinforcing:

  • Liquidity support for financial institutions improves market functioning
  • Well-functioning markets positively affect the ability of financial institutions to operate
  • Monetary policy easing (a lower interest rate) is more effective when markets are functioning, and banks have the liquidity they need to lend to business and households.

International co-operation

The Bank is also coordinating its actions with international policy makers, such as G7 central banks, and economic and financial partners in Canada.

For example, during the global financial crisis of 2007–08, the Bank established US-dollar swap lines with other central banks to ensure Canada’s financial institutions have access to US dollars. Most Canadian banks have US branches or subsidiaries and thus have access to US-dollar funding through the Federal Reserve’s discount window, so these swap lines weren’t used at the time. Nevertheless, should a Canadian bank need to borrow in US dollars, the swap lines give the Bank of Canada the ability to meet that need. This facility provides the Bank with additional flexibility to address rapidly evolving developments in financial markets.

See related announcements

Speeches and Statements

The Bank will continue to ensure Canadians have access to up-to-date information on its actions to support the economy and promote a safe and sound financial system in the face of the COVID-19 pandemic.

See related announcements

Key announcements

Monetary policy

March 13, 2020

Bank of Canada lowers overnight rate target to ¾ percent

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¾ percent, effective Monday, March 16, 2020. The Bank Rate is correspondingly 1 percent and the deposit rate is ½ percent. This unscheduled rate decision is a proactive measure taken in light of the negative shocks to Canada’s economy arising from the COVID-19 pandemic and the recent sharp drop in oil prices.

Content Type(s)PressPress Releases

March 4, 2020

Bank of Canada lowers overnight rate target to 1 ¼ percent

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to 1 ¼ percent. The Bank Rate is correspondingly 1 ½ percent and the deposit rate is 1 percent.

Content Type(s)PressPress Releases

Support to key financial markets

March 24, 2020

Bank of Canada Announces New Program to Support Provincial Funding Markets

The Bank of Canada today announced a new program to support the liquidity and efficiency of provincial government funding markets.

Content Type(s)PressMarket Notices

March 20, 2020

Bank of Canada Announces Additional Measures to Support Market Functioning

The Bank is announcing four measures today designed to support market functioning given the rapidly evolving uncertainty around the impact of COVID-19.

Content Type(s)PressMarket Notices

March 19, 2020

Revised operational details for the first Banker’s Acceptance Purchase Facility operation

As previously announced, the Bank of Canada (Bank) will conduct the first operation under the Banker’s Acceptance Purchase Facility (BAPF) on Monday, March 23, 2020. The operational details have been adjusted based on market conditions to the following

Content Type(s)PressMarket Notices

March 18, 2020

Bank of Canada Announces Temporary Expansion to the List of Eligible Securities for its Term Repo Operations and Changes to Upcoming Operations

The Bank of Canada (Bank) is committed to supporting the efficient and continuous functioning of financial markets during the current period of uncertainty in which conditions are evolving rapidly.

Content Type(s)PressMarket Notices

March 18, 2020

Operational details for the upcoming Expansion of the Bank of Canada’s Bond Buyback Program

Consistent with the announcement that the Bank of Canada (the Bank), acting as fiscal agent, will extend its buybacks across all benchmark maturity sectors, The Bank is announcing today the following operations for this week and next week

Content Type(s)PressMarket Notices

March 17, 2020

Operational details on the Bank of Canada’s Bankers’ Acceptance Purchase Facility

As previously announced, the Bank of Canada (Bank) will conduct secondary market purchases of 1-month Bankers’ Acceptances issued and guaranteed by any Canadian bank and of sufficiently high quality, broadly equivalent to a minimum short-term credit rating of R-1 (low), under the Bankers’ Acceptance Purchase Facility (BAPF).

Content Type(s)PressMarket Notices

March 16, 2020

Operational details for the Bank of Canada’s purchase of Canada Mortgage Bonds (CMBs) in the secondary market

Consistent with the announcement that the Bank stands ready, as a proactive measure, to provide support to the Canada Mortgage Bond (CMB) market, the Bank will purchase CMBs in the secondary market through a competitive tender process.

Content Type(s)PressMarket Notices

March 16, 2020

New Bank of Canada Measures to Support Key Funding Markets

The Bank of Canada is committed to supporting the efficient and continuous functioning of financial markets during the current period of uncertainty in which conditions are evolving rapidly.

Content Type(s)PressMarket Notices

March 13, 2020

Bank of Canada’s Intention to Introduce a Bankers’ Acceptance Purchase Facility

In order to support the continuous functioning of financial markets, the Bank of Canada (Bank) is announcing its intention to launch the Bankers’ Acceptance Purchase Facility (BAPF).

Content Type(s)PressMarket Notices

March 12, 2020

Bank of Canada Announces the Expansion of its Bond Buyback Program and Term Repo Operations

In order to support the continuous functioning of financial markets through the provision of liquidity, the Bank of Canada announced two measures today.

Content Type(s)PressMarket Notices

Liquidity support for financial institutions

March 19, 2020

Bank of Canada launches the Standing Term Liquidity Facility

The Bank of Canada (the Bank) is announcing the launch of its new liquidity facility, the Standing Term Liquidity Facility (STLF), effective March 30, 2020.

Content Type(s)PressMarket Notices

March 18, 2020

Additional Temporary Changes to the Bank of Canada’s Standing Liquidity Facility Collateral Policy Regarding the Non-Mortgage Loan Portfolio and Settlement Balances

Under its Standing Liquidity Facility (SLF), the Bank of Canada is prepared to provide liquidity on a daily basis to financial institutions that participate directly in the payments systems operated by Payments Canada. Loans made by the Bank of Canada must be fully collateralized.

Content Type(s)PressMarket Notices

March 16, 2020

Temporary Changes to the Bank of Canada’s Standing Liquidity Facility (SLF) Collateral Policy Regarding the Non-Mortgage Loan Portfolio (NMLP) and Settlement Balances

Under its Standing Liquidity Facility (SLF), the Bank of Canada is prepared to provide liquidity on a daily basis to financial institutions that participate directly in the payments systems operated by Payments Canada. Loans made by the Bank of Canada must be fully collateralized.

Content Type(s)PressMarket Notices

International co-operation

March 24, 2020

Statement of G7 Finance Ministers and Central Bank Governors

Consistent with the direction from G7 Leaders, we are taking action and enhancing coordination on our dynamic domestic and international policy efforts to respond to the global health, economic, and financial impacts associated with the spread of the coronavirus disease 2019 (COVID-19).

Content Type(s)PressAnnouncements

March 20, 2020

Coordinated Central Bank Action to Further Enhance the Provision of U.S. Dollar Liquidity

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to further enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.

Content Type(s)PressAnnouncements

March 15, 2020

Coordinated Central Bank Action to Enhance the Provision of Global U.S. Dollar Liquidity

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.

Content Type(s)PressPress Releases

March 3, 2020

Statement of G7 Finance Ministers and Central Bank Governors

We, G7 Finance Ministers and Central Bank Governors, are closely monitoring the spread of the coronavirus disease 2019 (COVID-19) and its impact on markets and economic conditions.

Content Type(s)PressPress Releases

Speeches and statements

March 18, 2020

Press Conference Opening Statement – March 18, 2020

Opening Statement Stephen S. Poloz Ottawa, Ontario

The Bank of Canada has been working hard to ensure the financial system has sufficient liquidity so that credit continues to be available to businesses and households.

Content Type(s)PressSpeeches

March 17, 2020

Summary of Deliberations of Governing Council, March 13, 2020

Governing Council’s decision to cut interest rates on Friday, 13 March, 2020 took place under unique circumstances. As such, Governing Council is offering this statement of its reasoning from the decision of March 13.

Content Type(s)PressPress Releases

March 13, 2020

Canada outlines measures to support the economy and the financial sector

Today, Minister of Finance Bill Morneau, Governor of the Bank of Canada Stephen Poloz, and Superintendent of Financial Institutions Jeremy Rudin outlined a coordinated package of measures being taken by financial sector partners to support the functioning of markets and continued access to financing for Canadian businesses.

Content Type(s)PressPress Releases

March 13, 2020

Press Conference Opening Statement – March 13, 2020

Opening Statement Stephen S. Poloz Ottawa, Ontario

The Bank of Canada is contributing to the collective effort to support the Canadian economy and financial system, and to ensure credit channels remain open.

Content Type(s)PressSpeeches

March 5, 2020

Labour market is key to Canada’s resilience

Stephen S. Poloz Women in Capital Markets Toronto, Ontario

Governor Stephen S. Poloz talks about how the labour market is a key source of resilience for Canada’s economy and reviews the Bank of Canada’s decision to lower interest rates. 

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