MNI POLICY: Text of BOC Statement of March 13 Deliberations

By Greg Quinn

     OTTAWA (MNI) - Following is the text published Tuesday outlining the BOC's

deliberations before its unscheduled 50bp interest-rate cut on March 13:

It is customary for the Bank to provide a summary of the deliberations of

Governing Council after each interest rate decision. This takes the form of an

opening statement at the meetings when we publish an MPR, or a public speech the

day after meetings for which there is no MPR.

     Governing Council's decision to cut interest rates on Friday, 13 March,

2020 took place in neither of these contexts. Given those unique circumstances,

Governing Council is offering this statement of its reasoning from the decision

of last Friday, March 13.

     The macroeconomic situation has been evolving very rapidly as the COVID-19

coronavirus spreads around the world. In addition to the disruptions to

production, travel and other economic activity, there has been a major drop in

the world price of oil, a very important transmission channel for the Canadian

economy. While Bank staff are hard at work to assess the macroeconomic

consequences for the economy, there are clear and present downside risks to

economic growth and inflation.

     In this context, the Governor and Senior Deputy Governor have been in close

contact with the heads of central banks in other countries, other key Canadian

policy makers and the CEOs of Canada's largest banks. All countries are facing

similar circumstances, albeit to different degrees. This has resulted in a high

degree of international policy coordination in recent weeks.

     On the morning of March 13, the Governor and Senior Deputy Governor

participated in a meeting with the Minister of Finance, the Deputy Minister of

Finance and the Superintendent of Financial Institutions. At that time, the Bank

outlined its intention to introduce to the market a Bankers' Acceptance Purchase

Facility to help relieve stresses in lending markets, particularly for small and

medium-sized businesses. This would work in a complementary way to the

government bond buyback program and the expansion of term repo operations that

had been announced the preceding day, in an effort to promote good functioning

of financial markets. At the same meeting, the Superintendent indicated that

OSFI was prepared to announce a significant reduction in the domestic stability

buffer to augment the lending capacity of Canadian banks; this followed similar

moves in other major economies. Furthermore, the Minister of Finance stated his

intention to introduce a significant fiscal stimulus in the following week. The

Minister suggested that making a joint announcement of these moves by the Bank,

OSFI and himself, later that same day, would be a powerful confidence-boosting

statement for consumers, business and financial markets. Interest rates were not

discussed at that meeting.

     Later that day, the Governor and Senior Deputy Governor convened a meeting

of Governing Council and briefed the other members about the impending

announcements by other federal agencies. Although a revised staff projection was

not yet available, it was evident to Governing Council that the disruptive

impact of the coronavirus, along with the drop in oil prices, would in all

likelihood justify some further easing of policy in the coming weeks. The

economic consequences of the coronavirus itself will clearly have a major

negative impact on the economy. Both the size and duration of this impact are

unknown, but it was acknowledged that the effects should ultimately prove to be

temporary. The impacts of the drop in oil prices are much more quantifiable and

potentially more long-lasting. We recognized that maintaining the availability

of credit to Canadian businesses and households is of the utmost importance in

supporting the economy through a major temporary disruption of this nature. In

this context, the discussion moved to the question of the appropriate timing of

any further interest rate adjustments: waiting until our next fixed announcement

date in mid-April, when we would also have a new staff projection; waiting for

another move in global interest rates, thereby capitalizing on an international

coordination effect, as we had done on March 5; or moving rates on Friday,

thereby helping to create an even more powerful, domestically-coordinated policy

package. After some discussion of the relative merits, Governing Council

concluded that there could be considerable benefit to reducing interest rates

immediately and significantly to complement the other measures supporting the

functioning of credit markets.

     Accordingly, Governing Council decided on March 13 to reduce interest rates

by 50 basis points, effective March 16, and to issue a press release at the same

time as the other announcements mentioned above. Governing Council stands ready

to adjust policy further and to deploy other market tools, if required, to

support economic growth and keep inflation on target.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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