Bank of Canada cuts rates and aims to help funding for business
- In another surprise move, the Bank of Canada cut its overnight rate by 50 basis points to 0.25 per cent. Comments for Governor Poloz indicated that he felt that this is the lower bound for rates, as he believes that further rate reduction or negative interest rates would not provide a significant economic boost. This was anticipated in the Deloitte economic forecast.
- The Bank also announced a commercial paper purchase program. The goal of this program is to provide a source of short term funding for business.
- To address strains in the Government of Canada debt market, the Bank will begin purchases of Government of Canada securities. The Bank will purchase a minimum of $5 billion a week, across the yield curve.
- We consider this monetary policy stimulus to substantive. Combined with the prior rate cuts and liquidity measures, the Bank of Canada is limiting financial strains during the crisis and is helping the funding environment that is critical for businesses.
Federal government announces support for businesses
- As noted in past E-sights, we were keenly awaiting news of more federal efforts to support businesses. Today, the Prime Minister announced actions the government was taking on this front.
- Federal wage subsidy for businesses will increase from 10% to 75% for qualifying businesses, to help companies keep people on the payroll or re-hire those already laid off due the pandemic. This brings Canada in line with jurisdictions such as Denmark and the UK. This subsidy will be backdated to March 15. The original 10% program was for SMEs, and we expect that small firms will be the qualifying businesses.
- For those who have lost their job, or are self-employed, the Canada Emergency Response Benefit (CERB) will still be available.
- Canada Emergency Business Account (CEBA) will be launched. Banks will offer interest free (for a year) loans of $40,000 backed by government to qualifying businesses, with $10,000 forgivable if certain conditions are met.
- Backed by $12.5B in support to EDC and BDC, to help SMEs with cash flow requirements. Businesses may apply for a guaranteed loan through financial institution.
- There will be deferral on GST and HST payments, as well as duties and taxes on imports.
- This represents significant support to SMEs and should help many of them to weather the economic storm – although times will still be hard and some may still fail. Now, we look for programs to support hard-hit larger business sectors – so stay tuned.
BC launches supply chain measures
- It is noteworthy that BC is acting through regulation to affect supply chains, as it sets a precedent that other jurisdictions could follow.
- Effective immediately, BC has established a new provincial supply chain coordination unit. This unit will work in partnership with industry to coordinate goods and services distribution. Retailers and suppliers must report inventories on critical supplies, including health supplies for frontline workers.
- BC has banned the resale of food, medical suppliers, personal protective equipment, cleaning and other essential supplies. They are also working with retailers to restrict quantities of certain essential products at the point of sale.
Canadian banks provide mortgage relief
- More than 213,000 requests for mortgage deferrals have been completed or are still being processed by the country’s six largest banks. On March 17, the banks announced a program that allows customers facing financial hardship as a result of COVID-19 to defer payments for up to six months.
- Given the high indebtedness of Canadian households, this is an important action to address the negative income shock on households. Without such a program, mortgage defaults and personal bankruptcy would increase sharply. However, it is also important to recognize that the negative income shock is still present and high indebtedness will temper the recovery.
G20 commits to do ‘whatever it takes’
- G20 leaders pledged US$5-trillion in global stimulus funding. The WHO, IMF, WBG, and multilateral and regional development banks are deploying "robust, coherent, coordinated, and rapid" financial packages.
- Many commentators have interpreted these measures as a call to all governments to "do more for everyone by doing more for your own [people]".
- We feel that, much like the financial crisis of 2008/09, coordinated fiscal and monetary stimulus will be instrumental in helping a recovery. The massive stimulus is why many forecasters, including ourselves, are expecting a rebound in the second half of the year after an unprecedented contraction in Q2.