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THE BANK OF CANADA: ITS HAND FORCED, A STRONG PLAY Canada’s central bank has acted swiftly to loosen monetary policy and support the economy through a difficult transitory period.
Generally-speaking, the Bank of Canada cuts its trend-setting interest rate when the economy needs a kick-start; this lower rate then has ripple effects through the economy as other lenders follow suit. This has the effect of incentivizing borrowing, enhancing consumer spending, and deepening business investment beyond levels that would otherwise be achieved with higher rates. This is rarely a panacea for an economy that is f lashing recessionary warning signs due to structural imbalances that need to be addressed, but it does help to prevent a deeper downturn. In past downturns, the Bank of Canada has had more wiggle-room than it had at the outset of the Great Suppression: for example, during the early-2000s recession, the Bank was able to lower rates by 375 basis points, from 5.75% to 2.00%. During the Great Recession, the Bank cut its policy rate by 425 basis points, from 4.50% in November 2007 to 0.25% by April 2009. Such a luxury was not available this most
recent time around, as Canada’s pre- recession policy rate was only 1.75%— notably, the lowest ever going into a recession. The Bank did what it could and promptly cut the rate by 150 basis points to what it refers to as its “effective lower bound” of 0.25%. Fortunately, that isn’t the end of this story as it relates to the Banks’ ability to impact the economy. For the first time ever, the Bank of Canada—in conjunction with its rate cuts— committed to a program of Quantitative Easing, which involves purchasing longer- term debt from the federal government and provincial governments, as well as a limited volume of high-grade corporate bonds. Along with government fiscal supports, the Bank’s efforts have staved off what could have been a much deeper downturn. Hopefully their efforts will have the additional effect of cajoling the economy back to its pre-pandemic levels.
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