Purpose: This memo analyzes the Bank of Canada’s (BoC) monetary policy responses to counteract COVID-19’s negative Canadian economic effects. This analysis examines money supply and demand, open-market purchases, and Consumer Price Index (CPI) within Canada and provides a brief comparison to the US Federal Reserve’s monetary policy responses. This analysis finds that the BoC’s COVID-19 monetary policy responses have positively contributed to partial economic recovery.

Overview of COVID-19 and the Bank of Canada’s Monetary Policy Responses

Precipice: From December 2019 to February 2020, the BoC’s overnight rate[1] changed from 1.7487% to 1.7485% with a 1.75% monthly target overnight rate[2] (Bank of Canada, 2020m). Simultaneously, Canada’s real GDP[3] increased from 1.987 to 1.994 (Statistics Canada, 2020b). The overnight rate, real GDP, and several other monetary policy variables changed substantially in March with COVID-19’s first wave and Canada’s economic fall (Department of Finance, 2020a).

Fall: Canadian COVID-19 active cases increased from 20 on March 1st to 27,601 on July 16th (Worldometer, 2020). Real GDP fell from February’s 1.987 to 1.633 in April (Statistics Canada, 2020b). To recover, the BoC implemented seven open market purchase programs: the Canada Mortgage Bond Purchase Program (CMBP), Bankers’ Acceptance Purchase Facility (BAPF), and Provincial Money Market Purchase Program (PMMP) in March; the Government of Canada Bond Purchase Program (GBPP) and Commercial Paper Purchase Program (CPPP) in April; and the Provincial Bond Purchase Program (PBPP) and Corporate Bond Purchase Program (CBPP) in May (Bank of Canada, 2020c: 2020d: 2020f: 2020h: 2020i: 2020j: 2020l; Figure 1). During these program implementations, the BoC dropped the target overnight rate from 1.75% to 0.25% in March, and the Royal Canadian Mounted Police (RCMP) invoked the Quarantine Act in April (Canadian Press, 2020). These efforts were made to increase the money supply, decrease interest rates, and raise real GDP and CPI to begin an economic recovery (Bank of Canada, 2015).

Recovery: Canadian COVID-19 active cases increased from 27,601 on July 16th to 66,369 on December 2nd (Worldometer, 2020). Alongside this active increase in cases, the Canadian economy has begun to recover (Department of Finance, 2020b). The BoC’s open market purchase programs have increased the money supply[4] from February’s 9.7 to 27.9 in September[5] and increased real GDP from April’s 1.633 to 1.911 in September[6], moving towards recovery (Bank of Canada, 2020m; Statistics Canada, 2020a).

Figure 1: Important Canadian COVID-19 and Monetary Policy Dates
Sources: Authors creation from Bank of Canada, 2020h; Canadian Press, 2020.

Breakdown of COVID-19’s Effects on Canadian Monetary Policy Variables

The BoC’s only goal is to achieve and maintain a low, stable, and predictable inflation level (Murray, 2013). The BoC has two methods to achieve this goal: change the money supply or change the target overnight rate (Murray, 2013). Money supply is increased through open market purchases. The BoC tries to maintain a 1-3% inflation rate by keeping the overnight rate around 1.75% in recent years (Abel et al., 2014). COVID-19 has put several economic pressures on Canada’s economy like real GDP, labour market, and inflation decreases (Ambler and Kronick, 2020; Faveri, 2020). To address these economic shocks, the BoC has implemented several monetary policy responses (Bank of Canada, 2020k):

Open Market Purchase Programs and Money Supply: The first method the BoC can use to influence the inflation rate is to increase the money supply through open market purchases (Murray, 2013). From March to May, the BoC implemented seven open market purchase programs: the CMBP, BAPF, and PMMP in March, the GBPP and CPPP in April (during RCMP’s Quarantine Act invocation), and the PBPP and CBPP in May (Figure 2). Since these programs’ implementation, the money supply has increased from 13 in March to 27.9 in September (Bank of Canada, 2020m). This money supply increase should then reduce nominal interest rates and increase real GDP spending (Chen et al., 2020). As open market purchase programs increase the money supply, the real GDP increased from 1.633 in April to 1.91 in October (Bank of Canada, 2020m; Figure 2; Statistic Canada, 2020b).

Figure 2: Overnight Rate, Target Overnight Rate, GDP, and Money Supply against Important Dates
Source: Authors creations from Bank of Canada, 2020b: 2020g: 2020m; Bronca, 2020; Statistics Canada, 2020b.

Money Demand and Nonmonetary Assets: As a general economic principle, as the money supply increases – nominal and overnight interest rates decrease, and the demand for money increases, at least in the short term (Abel et al., 2014; Murray, 2013; Ragan, 2007). This money demand increase will contribute to increased nonmonetary asset spending (like purchasing houses), as their nominal interest rates are lower (Abel et al., 2014). This general principle is supported: when the BoC’s overnight rate decreased from 1.75% to 0.25% in April, the housing price index[1] increased from 104.1 in April to 107.3 in October (Figure 3; Government of Canada, 2018: 2020; Statistics Canada, 2020b).

Figure 3: Housing Price Index, Total CPI, and Overnight Rate against Important Dates
Sources: Authors creations from Bank of Canada, 2020m; Bronca, 2020; Statistics Canada, 2018: 2020b.

Consumer Price Index (CPI)[1] and Inflation: The second method the BoC can use to influence the inflation rate is changing the target overnight rate (Murray, 2013). The BoC looks to the inflation rate, calculated through the CPI, when determining its monetary policy (Murray, 2013). CPI has an annual target growth range between 1-3%, with 2% being the common target rate (Murray, 2013). When CPI is not within this range, the BoC will typically increase or decrease the overnight rate to influence the CPI back within its target range. COVID-19 has negatively influenced Canada’s inflation rate, decreasing from 2.2% in February to -0.4% in May (Statistics Canada, 2020b). This inflation decrease was met with a decrease in the target overnight rate from 1.75% to 0.25% (Bank of Canada, 2020m). After the BoC’s target overnight rate decreased, the CPI started recovering, moving from -0.4% to 0.7% (Figure 3). While this recovery is good, the BoC does not expect a full CPI recovery until 2023 (Bank of Canada, 2020e).

US Federal Reserve COVID-19 Monetary Policy Responses

Like the BoC, the US Federal Reserve can change the money supply or overnight rate to influence the inflation rate (Murray, 2013). As COVID-19 continues to affect national economies, a brief comparison to the Federal Reserve’s COVID-19 monetary policy responses demonstrates similar COVID-19 monetary policy response trends to the BoC (Bahaj and Reis, 2020; Chetty et al., 2020; Department of Finance, 2020b).

Figure 4: US M1 to CPI
Sources: Authors creation from Federal Reserve Economic Data, 2020a: 2020b: 2020c.

Money Supply: Like the BoC, the Federal Reserve can increase the money supply (M1[1]). M1 increased from 3940 in February to 5571 in October (Federal Reserve Economic Data, 2020c; Figure 4). Following the same general monetary policy principles, this money supply increase should influence the CPI. This general principle is supported as CPI increased from 256 in April to 260 in October (Federal Reserve Economic Data, 2020a; Figure 4).

Figure 5: US Target Overnight Rate to CPI
Sources: Authors creation from Federal Reserve Economic Data, 2020a: 2020b: 2020c.

Target Overnight Rate: The second method central banks can use to influence CPI is changing the target overnight rate (Murray, 2013). Like the BoC, the Federal Reserve decreased its target overnight rate from February’s 1.75% to 0.25% in March (Federal Reserve Economic Data, 2020b). Decreasing the target overnight rate is done to increase CPI (Abel et al., 2014). This principle is supported when the Federal Reserve’s target overnight rate decreased from 1.75 to 0.25%, and the CPI increased from 256 in April to 260 in October (Federal Reserve Economic Data, 2020a; Figure 5).


  1. There are time lags between a monetary policy’s implementation and its results. The figures presented and conclusions drawn will likely shift as COVID-19 continues to develop and resolve, and more data is collected and analyzed (Chen et al., 2020; Murray, 2013).
  2. As of now, there is no published peer-reviewed academic literature on Canada’s COVID-19 monetary policy responses. While this does not affect this memo’s findings, it makes for a significant literature gap that could provide weight or counterarguments.
  3. While CPI is a useful inflation measure, CPI is better when understood over the long-term rather than short-term. As more CPI data becomes available, the BoC can better comprehend the impact of their monetary policy responses (Abel et al., 2014).


COVID-19 has continued to shock the Canadian economy with real GDP, labour market, and inflation declines (Bank of Canada, 2020m; Statistics Canada, 2020b). Two general monetary policy responses can be applied to correct these declines: money supply increases or target overnight rate decreases (Murray, 2013). The BoC used each general monetary policy response to correct these declines, increasing the money supply from 13 in March to 27.9 in September through open market purchases and lowering the target overnight rate from 1.75% to 0.25% in March (Bank of Canada, 2020m). Each monetary policy response has contributed to the CPI increase from -0.4% in May to 0.7% in October (Statistics Canada, 2018). To further support the use of these general monetary policy responses, a brief comparison to the US Federal Reserve monetary policy response was presented. This comparison found mirrored monetary policy responses to COVID-19’s effect on the US economy: increasing money supply and decreasing the overnight rate both influenced their CPI’s increase (Federal Reserve Economic Data, 2020a: 2020b: 2020c). While both Canada and the US are experiencing COVID-19’s second wave, monetary policy responses seem to influence each economy positively.

Benjamin Faveri is a Master of Public Policy and Administration student at Carleton University. He has received SSHRC, OGS, the Social Innovation Graduate Fellowship, and several other scholarships and awards to support his research. He holds undergraduate degrees in Criminology and Psychology and Certificates in Global Entrepreneurship and Foreign Intelligence Assessment. He works on research projects surrounding: jury decision-making; Canadian police body-worn camera data governance policy; and private artificial intelligence governance.

Banner image by Wladyslaw, courtesy of Wikimedia Commons.


[1] Overnight rate: the interest rate charged by one bank to another for daily balance settling (Abel et al., 2014).
[2] Target overnight rate: BoC’s overnight rate goal set through monetary policy (Abel et al., 2014).

[3] real GDP, base year is 2012, and is measured in trillions (Statistics Canada, 2020b).

[4] This memo uses M1+ (measured as a 12-month growth rate) as the money supply (Bank of Canada, 2020m).

[5] The BoC does not have M1+ data past September 2020.

[6] Statistics Canada does not have real GDP data past September 2020.

[7] Housing Price Index measures in new residential house sales prices (Statistics Canada, 2020).

[8] CPI is calculated as the current cost of a fixed basket of goods over the cost of the same basket in a base period (Abel et al., 2014).

[9] Measured in billions USD (Federal Reserve Economic Data, 2020c).


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