The Bank of Canada has lowered its overnight policy rate for the second time this month, taking the rate down a further 50 basis points to 0.25%. This is what the Bank considers as its effective lower bound and any further reduction in rates is not possible without potentially disrupting key short-term funding markets.
In addition, two new programs have been announced to ensure the continued smooth running of credit markets and to promote credit availability. First, the Commercial Paper Purchase Program which aims at alleviating strains in the short-term funding market and the second entails the Bank purchasing Government of Canada bonds in the secondary market. The latter program is a type of what is generally called "quantitative easing" though the Bank's program is targeted at all maturities, rather than longer-term yields as in traditional quantitative easing.
All of these changes are aimed at keeping the Canadian financial system and credit markets functioning during this extraordinary time. If this goes according to plan, we should see currently elevated risk spreads on mortgage products decline, reversing recent increases in Canadian mortgage rates.
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