12 percentage points. This unexpected decision was made amid the global financial crisis and a weakening Canadian economy as a result of the outbreak of COVID-19.
The move marked the first time the BOC had lowered its overnight lending rate — the rate at which banks borrow from each other overnight — since March 2007. It was also the biggest single rate cut in at least 20 years. The reduction brought the central bank’s key policy rate to 3.0%, its lowest level since April 2002.
The decision was made in order to stimulate economic activity and consumer spending, as well as to encourage borrowing and investment activity. In addition, the cut was an effort to stabilize the financial markets and to support businesses affected by the pandemic.
The rate cut was welcomed by the Canadian government, as well as by industry groups and other market participants. Businesses, in particular, saw it as a way to bring down borrowing costs and increase liquidity in the market. The lower rates also allowed borrowers to refinance their mortgages at a lower cost, which was seen as a beneficial move for households struggling financially due to the economic downturn.
The Bank of Canada had previously taken measures to address the impact of the coronavirus on the economy. This included cutting the rate twice in 2020, in March and April. However, these smaller cuts did not provide much stimulus to the economy, and so the central bank decided to take bolder action with this surprise rate cut.
Although the move was met with approval from the government and various industry groups, there were some who raised concerns that cutting rates too drastically could lead to inflationary pressures and further weaken the Canadian dollar. Nonetheless, the Bank of Canada deemed the rate cut a positive step forward and hoped that it would provide support to businesses and households adversely affected by the pandemic.
In summary, the Bank of Canada's surprise 0.12 percentage point rate cut in October 2008 was intended to jump-start economic activity amidst the global financial crisis and the start of the COVID-19 pandemic. The move met with approval from the government and multiple industry groups, as low borrowing costs and increased liquidity can help stimulate both consumption and investment. However, there were also concerns that reducing rates could lead to inflationary pressure and further weaken the Canadian dollar. Nevertheless, the Bank of Canada is hopeful that the rate cut will provide relief to those affected by the pandemic.
This article was contributed on Nov 29, 2023
