The Bank of Canada cut its key interest rate by half a percentage point to 0.25% in an unscheduled rate announcement Friday.
The central bank said its decision to lower rates is aimed at cushioning the economic shocks from Covid-19 and a sharp drop in oil prices by easing the cost of borrowing.
It added that providing credit in the economy for businesses that need it should help lay the foundation for the economy’s return to normalcy.
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.
The unexpected decision marks the second time this month the bank has made an unscheduled cut to its trend-setting interest rate and the third cut overall from the start of March when the rate was at 1.75%.
Bank governor Stephen Poloz said the goal of the decision Friday is to restore market functioning and help create a bridge for businesses and consumers over the economic shutdown linked to curbing the spread of Covid-19.
The move puts the overnight rate at an all-time low last seen in 2008-09. Poloz downplayed the idea of sending interest rates into negative territory, saying negative rates aren’t sensible at this stage.
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.
In a research note Friday, CIBC Capital Markets senior economist Royce Mendes said the introduction of “a form of quantitative easing” should help alleviate some economic pain and eventually support the recovery.
“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,” he wrote.