BoC: Ample room for the asset purchases to grow even larger – CIBC

The Bank of Canada (BoC) on Friday lowered by 50bps the key interest rate to 0.50%. Analysts at CIBC, point the Canandian economy looks set to sharply contract in the first half of 2020 and BoC actions will help alleviate some of the pain and will support the recovery, whenever that begins.

Key Quotes: 

“The Bank of Canada joined the string of central banks throwing the kitchen sink at the economic downturn. In a move we've been expecting, the Bank of Canada cut rates another 50bps, bringing the target for the overnight rate down to 0.25%. In the accompanying statement, the Bank noted that this was the effective lower bound, so further rate reductions to 0% or into negative territory seem ruled out.”

“There is ample room for the asset purchases to grow even larger or become more focused on a particular part of the yield curve to depress rates. The asset purchases  should engender a hunt for yield that could support longer-end private assets, but at some point credit easing could also become more targeted if that spillover doesn’t transpire."

“In the words of Governor Poloz, ‘A firefighter has never been criticized for using too much water.’ It’s clear then that Governor Poloz is signaling a willingness to be aggressive in battling the shock, a sharp change from a central bank that had previously been hesitant to stoke the fires of household debt accumulation with potentially unnecessary rate cuts."

“The economy looks set to sharply contract in the first half of 2020. Indeed, skyrocketing applications for employment insurance have been a sneak peek into the kind of pain currently being felt.”