March 27, 2020 / 1:39 PM / 2 months ago

UPDATE 4-Canada to cover 75% of small business wages, central bank cuts interest rates

(Adds details on government stimulus measures)

By Fergal Smith and Kelsey Johnson

TORONTO/OTTAWA, March 27 (Reuters) - Canada said on Friday it will cover 75% of wages for small businesses and the central bank cut its key interest rate for the third time this month to the lowest level in a decade, as officials sought to limit layoffs and bolster an economy hard hit by the coronavirus pandemic.

Prime Minister Justin Trudeau unveiled several measures for small- and medium- businesses including one-year interest-free loans, an additional $12.5 billion in funding via the country’s export development bank and delays in duties and tax payments to help boost cash liquidity.

“Our government knows you’re really feeling the impacts of this pandemic especially with the end of the month coming up,” Trudeau said in his daily address to Canadians. “So here’s what we’re going to do to take some of that pressure off.”

Trudeau, who has been in self-isolation since his wife tested positive for the coronavirus last week, said he will continue to work from home to model good practice.

Earlier, the Bank of Canada unexpectedly cut its overnight interest rate by 50 basis points to 0.25%, its lowest level since June 2010, from 0.75%. It was the second surprise cut in two weeks.

The central bank also launched what observers called its first-ever quantitative easing program, saying it would buy government and commercial debt.

“A firefighter has never been criticized for using too much water,” Bank of Canada Governor Stephen Poloz told reporters shortly after the rate cut was announced.

Canada’s parliament this week approved a C$52 billion ($37 billion) financial package to support the economy and Canadians left without work because of the impact of the epidemic.

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

While Poloz said the bank stands ready to “take further action as required”, he said the central doesn’t at this stage believe it would be sensible to think of interest rates going lower than this.

The Canadian dollar clawed back some of its declines after the rate cut, to trade at 1.4040 to the U.S. dollar.

‘FULL PLUNGE’

Poloz, who is set to retire in June, said the asset purchase program is aimed at improving the “functionality” in financial markets. He said that negative interest rates are an available tool, but he did not think they were suitable because they could have harmful effects on the financial system.

“Markets were fully expecting the Bank of Canada to cut its key rate by 50 basis points to the prior low of 0.25% at some point, but the Friday morning timing is yet another surprise,” said Douglas Porter, chief economist for the Bank of Montreal.

“But beyond that, the bigger news here is the Bank’s decision to take the full plunge into quantitative easing - it’s now official. It’s doubtful that this significantly adjusts the economic outlook, but it should help moderate some of the biggest swings in the Government of Canada bonds market,” he added.

The central bank launched the Commercial Paper Purchase Program (CPPP) to help alleviate strains in short-term funding markets. It will begin with purchases of C$5 billion of Government of Canada securities per week, across the yield curve.

Poloz said he will not dispute that the central bank’s liquidity measures look like quantitative easing (QE).

Andrew Kelvin, senior rates strategist at TD Securities, said the QE “was sorely needed and we expect that we will see probably more QE announced within the next quarter.” ($1 = 1.4109 Canadian dollars) (Reporting by Fergal Smith in Toronto and Kelsey Johnson in Ottawa; Additional reporting by Nichola Saminather and Jeff Lewis Writing by Amran Abocar; Editing by David Gregorio and Paul Simao)

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