Bank of Canada Makes Emergency Rate Cut

The Bank of Canada has made an unscheduled emergency rate cut for the first time since the 2009 financial crisis. Today, it dropped its overnight rate half a point to 0.75%, its second 50-bps cut in nine days.

In a statement, the BoC said: “It is clear that the spread of the coronavirus is having serious consequences for Canadian families, and for Canada’s economy. In addition, lower prices for oil, even since our last scheduled rate decision on March 4, will weigh heavily on the economy, particularly in energy intensive regions.”

Stress Test Changes Deferred

The government also announced it is suspending consultation on the proposed change to the mortgage stress test. This was part of a coordinated response by the Department of Finance, OSFI and the Bank of Canada.

The easier stress test was proposed to start on April 6, pending consultation and finalization by OSFI. The regulator’s consultation on those changes will now be “suspended” until normal financial conditions return, OSFI said.

This affects insured mortgages too. The current benchmark (presently 5.19%) will be used to qualify all insured and uninsured mortgages at federally regulated lenders until further notice.

What’s Next?

The BoC said it is working “in coordination with other G7 central banks.” To many, this suggests that if the Fed cuts more, the Bank of Canada will follow. Indeed, the Bank said it stands ready to cut further.

The Bank attributed much of its decision today to the collapse in oil prices. To the extent oil breaks Monday’s low, this will further increase chances for additional rate cuts.

The BoC said its intention with today’s cut is that “borrowing costs will be lowered both for new purchases and through variable-rate mortgages and mortgage renewals.” With that in mind, we’ll see if banks respect this intention and cut their prime rates promptly by the same amount.

If Canada’s Big 6 banks complied, the country’s benchmark prime rate would fall to 2.95%. That would mark its first trip under 3% since 2017. The all-time low for prime was 2.25% in 2009-10.