Announcement by Minister Morneau, OSFI, and the Bank of Canada

Brian DePratto, Senior Economist 416-944-5069

Date Published: March 13, 2020

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Canadian Authorities Step Up Their COVID-19 Response 

  • This afternoon, Federal Finance Minister Bill Morneau was joined by his counterparts from the Bank of Canada (Governor Poloz) and the Office of the Superintendent of Financial Institutions (Superintendent Jeremy Rudin) for a press conference addressing the economic impact of COVID-19. 
  • Following on the roughly $1 billion in measures released earlier this week, the authorities announced further measures, including:
    • A surprise inter-meeting 50 basis point cut to the Bank of Canada's monetary policy interest rate cut, bringing it to 0.75%. The Bank is also introducing a new Bankers’ Acceptance Purchase Facility, intended to support funding markets for small and medium sized firms. The Governor noted that the Bank also stands ready to take further action.
    • Minister Morneau announced a 'credit facility' program, $10 billion in size, to support Canadian small- and medium-sized businesses. This will be run through the quasi-governmental Business Development Bank of Canada (BDC) and Export Development Canada (EDC).
    • OSFI lowered the 'Domestic Stability Buffer', a capital requirement for systemically important banks, by 1.25 percentage points, to 1.00%. OSFI further committed to not increasing this buffer for at least 18 months. Superintendent Rudin estimated that this change could generate up $300 billion in additional lending capacity. OSFI will also suspend ongoing consultations with Banks regarding the so-called 'stress test' rate change for insured mortgage qualifications. This rate will now remain the Bank of Canada posted rate.
  • Finance Minister Morneau repeatedly stressed that a 'significant' stimulus package aimed at households and minimizing labour market disruptions will be announced next week.

Key Implications

  • A solid step in the right direction. Seemingly every day this week has brought new challenges and negative headlines related to COVID-19, not to mention the significant challenge brought on by the halving of oil prices since the start of the year. A response was clearly required, and not only was one delivered, but it came with the promise of more to come.  
  • These measures should go some distance in supporting business and household sentiment. The latter group appears to be the focus for new announcements from Minister Morneau next week. We look for additional measures of at least equal size to support individuals and households, including those such as the self-employed or those with low working hours that may not be able to access programs via the EI system. Just as important given the nature of the shock will be not only programs that support those who are directly affected by COVID-19, but also those impacted by 'social distancing' efforts to minimize the spread of the virus.  
  • Social and economic disruptions related to the virus will likely worsen in the coming weeks, but with the right supports in place, including those announced today, the peak economic impact has a good chance of being contained to a relatively short period. It will be hard to avoid an economic contraction in the second quarter due to social distancing efforts by businesses and overall activity, but a near-term recession is certainly not a forgone conclusion and that risk is now moving back to the tail of the distribution. Important to this outcome is that the U.S. government delivers an equally timely and sizeable response to backstop their economy and shore up the broader global market and sentiment.