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27 Mar

Bank of Canada Moves to Restore “Financial Market Functionality”

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Posted by: Aneta Zimnicki

Great economic insight on today’s Bank of Canada rate drop from Dominion Lending Centers Chief Economic, Dr. Sherry Cooper.

My summary:

Strains in the commercial paper and government securities markets triggered today’s action to engage in quantitative easing.

These large-scale purchases will create the liquidity in the financial system. Risk has risen, which creates the need for more significant cash injections.

The oil price cut alone would have been sufficient reason for the Bank of Canada to lower interest rates.

At this point, the Bank is not contemplating negative interest rates. Monetary policy has little further room to maneuver, given interest rates are already very low. With businesses closed, lower interest rates do not encourage consumers to go out and spend money.

Large-scale debt purchases by the Bank will continue for an extended period to provide liquidity. They want the economy to have an excellent foundation for growth when the economy resumes its normal functioning.

The cost of funds for the banks has risen sharply. CMHC is buying large volumes of mortgages from the banks, which, along with CMB purchases by the central bank, will shore up liquidity. The banks are well-capitalized and robust.

See Dr. Cooper entire article