Bank of Canada cuts key interest rate to 0.25% due to COVID-19

Canada’s central bank made yet another unscheduled rate cut Friday to bring its key interest target down to a crisis-level low, and the federal government upped its financial lifeline to businesses in a two-pronged effort to further combat the economic shock from COVID-19.

It was the double shock from the novel coronavirus and a sharp drop in oil prices that spurred the Bank of Canada’s surprise announcement – its second unscheduled cut this month and third overall this month – to lower its rate by half a percentage point to 0.25 per cent after it started the month at 1.75 per cent.

The interest rate cut takes the key rate to what the central bank referred to as “its effective lower bound” or the lowest level that rates can be set, although they alone may not spur economic activity because workers are being asked to stay home.

Governor Stephen Poloz said there are still tools left in the central bank’s kit, but it was trying to do everything it can right now to deal with deep economic shock.

“A firefighter has never been criticized for using too much water,” Poloz said.

“We want to make sure that we’ve got a great market function and indeed that the economy has a great foundation for growth when activity resumes.”

The central bank also launched two new programs.

One will aim to alleviate strains in short-term funding markets, while the other will see the central bank begin acquiring federal government securities in the secondary market with a minimum of $5 billion per week.