One of the ways central banks* have tried to mitigate the negative effects of the COVID-19 pandemic is by lowering interest rates. The basic idea is that lower interest rates stimulate the economy by making it less costly to borrow money which, in turn, leads to more investment, spending and jobs. 

When an economy is heating up, interest rates are typically raised as a way to “tap the brakes” and keep inflation in check.

With the pandemic causing economies around the world to ice over, a number of central banks have lowered interest rates.

Here in Canada, our central bank—aptly named the Bank of Canada—lowered its key policy interest rate three times in March, bringing it down from an already low 1.75 per cent to just 0.25 per cent.

While perhaps not off the table if economic conditions deteriorate further, the Bank has indicated that 0.25 is as low as it will go and that it will not be experimenting with the negative interest rates in place in countries such as Switzerland (-0.75 per cent) and Japan (-0.1).

In the United States, the Federal Reserve lowered its target for the federal funds rate—the benchmark for many interest rates in the US—to a range of 0 per cent to 0.25 per cent on March 15, 2020.

The Bank of England lowered the official bank rate to 0.10 per cent on March, 19 2020 while the European Central Bank—the central bank for the eurozone—reduced what it calls the refi (refinancing) rate to 0.0 per cent back in March 2016.

The People’s Bank of China lowered its base rate to 3.85 per cent on April 20, 2020.

Although far from a silver bullet, lower interest rates are helping to keep national economies from grinding to a halt under the pressure of the pandemic.

*According to Investopedia, a central bank is “a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks.”

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A note on COVID-19: The COVID-19 pandemic is having a major impact on the economy here in Alberta and around the world. The Owl will report on these impacts when good information is available while continuing to track regularly scheduled releases of economic data and long-term trends. Please go to atb.com for COVID-19-related updates from ATB Financial.