The Bank of Canada (the Canadian central bank) announced on 21 April 2009 that it was lowering the "target for the overnight rate" (the interest rate at which major financial institutions borrow and lend one-day or overnight funds among themselves) to 0.25%. At the same time, the "Bank Rate" (the minimum rate of interest that the Bank of Canada charges on one-day or overnight loans to financial institutions), was consequentially lowered to 0.50%.

The target for the overnight rate is often referred to as the Bank of Canada's key interest or policy rate, as changes in the target for the overnight rate influence other interest rates, such as those for consumer loans and mortgages, and can affect the Canadian dollar exchange rate.

This is a history making change, in that this is the lowest this rate has ever been.

In making this announcement, the Bank of Canada stated that 0.25% is what it judges to be the effective lower bound for overnight loans between financial institutions. In the past, the borrowing rate between financial institutions has operated in a 50 basis point band, with the Bank Rate as the upper end of this band and the target for the overnight rate being the midpoint of the band. As a result, before this change, the most creditworthy major financial institutions could have possibly obtained overnight funds at an interest rate less than the target for the overnight rate.

Accordingly, without other actions from the Bank of Canada, with this present lowering of the target for the overnight rate, the most creditworthy major financial institutions could have possibly obtained overnight funds at an interest rate below 0.25%, which could impair the functioning of credit markets in a low interest rate environment. However, the Bank of Canada has narrowed this operating band to 25 basis points through a few targeted methods, including by leaving the deposit rate (the rate paid on deposits maintained by financial institutions with the Bank of Canada) unchanged at 0.25% per cent, and thereby providing the floor for the overnight rate.

Other changes announced by the Bank of Canada to assist in providing a floor for the overnight rate and a ceiling for the Bank Rate include making available an unprecedented daily cash settlement balance of Can$3 billion - far in excess of the usual Can$25 million daily cash settlement balance in the financial system. Other changes in this connection are set out in the Bank's Operating Framework for the Implementation of Monetary Policy at the Effective Lower Bound for the Overnight Interest Rate.

Although this reduction in the target for the overnight rate and related assistance in reinforcing a 25 basis point operating band are highly important themselves, the unprecedented guidance provided by the Bank of Canada regarding interest rates for the next 14 months is even more significant. The Bank of Canada stated that, conditional on the outlook for inflation, the target for the overnight rate can be "expected to remain at its current level until the end of the second quarter of 2010 in order to achieve" the Bank of Canada's core inflation target of 1 to 3% (the Bank of Canada's forecast is that inflation is expected to fall through 2009, before gradually returning to the 2% mid range of the target in the third quarter of 2011).

In making this commitment, the Bank of Canada stated that "it is appropriate to provide more explicit guidance than is usual regarding [monetary policy's] future path so as to influence rates at longer maturities". The Bank of Canada has indicated that it will continue to provide such guidance in its scheduled interest rate announcements as long as the target for the overnight rate is at 0.25%.

The next scheduled announcement date is 4 June 2009.

The Minister of Finance, Jim Flaherty, released a consultation paper on 26 April 2009 seeking views on the potential merits of allowing banks and other federally regulated financial institutions to offer financial leasing for vehicles as well as other household property. Comments on the consultation paper will be accepted until 8 May 2009.

Banks have always been able to offer purchase financing for cars. However, for policy reasons, banks have been unable to offer financial car leasing to consumers for the last 30 years. Given the current environment, the federal government is contemplating allowing banks to lease cars to consumers as other sources of lease financing have become severely restricted, further impairing the automobile industry in Canada.

In reviewing this possibility, the federal government seeks comments on the following questions:

The prevailing view is that in the current economic climate, if the government permits banks to offer financial car leasing, this will likely benefit consumers, dealers, manufacturers and banks. Accordingly, we expect comments from most interested parties to favour relaxing the current restrictions.

The Bank of Canada announced on 23 April 2009 in its April 2009 Monetary Policy Report the outline of a framework that describes the Bank of Canada's monetary policy approach when the overnight interest rate is at its effective lower bound (0.25%). Mark Carney, the Governor of the Bank of Canada, reiterated this on 28 April 2009 in statements he made to the House of Commons Standing Committee on Finance.

This new monetary policy framework allows for the possibility that additional stimulus could be provided through either/both the "unconventional" methods of:

In this connection, Mr Carney stated that as "these are uncertain times, and if additional stimulus were to become necessary, the Bank retains considerable flexibility in the conduct of monetary policy at low interest rates." Mr Carney stated that the framework was published because of the importance of outlining the available alternatives in a principled and transparent fashion. If the Bank of Canada were to deploy either quantitative easing or credit easing, Mr Carney has stated that it would act in a deliberate and principled fashion.

Mr Carney has made it clear that the focus of these alternatives, if implemented, would be to improve overall financial conditions to support demand and achieve the Bank of Canada's core inflation target. In this connection:

Given the Bank of Canada's and Mr Carney's reported statements regarding the high level of confidence in the Bank of Canada's current policies, many commentators think that these alternatives probably will not be used unless some unforeseen economic shock takes place.