- Overnight rate cut by 50 bps to 1.25%
- Outlook “clearly weaker” given coronavirus outbreak and transitory disruptions
- BoC “stands ready to adjust monetary policy further,” leaving April rate cut on the table
The Bank of Canada lowered its overnight rate by 1/2 percent, primarily in response to economic risks posed by the global coronavirus outbreak and the associated tightening in financial conditions and declines in commodity prices. Slower underlying GDP growth and yet more transitory disruptions to economic activity (rail blockades, teachers’ strikes and winter storms) also contributed to the decision to cut rates.
A rate cut by the BoC today seemed like a foregone conclusion, particularly after the Fed’s emergency 50 basis point cut yesterday, but the size of the move was a closer call. Markets were leaning toward a 50 bp cut—though it wasn’t fully priced in, as evidenced by a weaker Canadian dollar this morning—while we were expecting a more measured 25 bp cut followed by a similar move in April. With today’s statement leaving the door wide open to further easing, we still think the BoC is likely to cut in April in addition to today’s larger-than-expected move.
It’s fair to ask what lower interest rates will do to offset demand and supply shocks related to the coronavirus outbreak. At this stage, the move is more likely to shore up financial market sentiment and support business and consumer confidence. In addition to today’s rate cut, comments that the BoC stands ready to ease further, will ensure the financial system has sufficient liquidity, and will coordinate with other G7 central banks and fiscal authorities were important aspects of the central bank’s response. Lower rates may also help support growth before and after the most severe disruptions to economic activity. But it’s the response from other policymakers, particularly fiscal and health authorities, that could do more to cushion the blow as the coronavirus outbreak intensifies.
