Bank of Canada Lowers Key Interest Rates in Response to Economic Shock from Coronavirus Outbreak

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Photo by Jason Hafso on Unsplash

As the coronavirus continues to spread globally, it’s causing serious economic consequences. And, as a result, the Bank of Canada says it’s cutting its key interest rate target by half a percentage point in response to the outbreak.

On Wednesday morning, the Bank of Canada announced it lowered its target for the overnight rate by 50 basis points to 1.25 percent because the COVID-19 virus is a “material negative shock” to the Canadian and global outlooks, and as a result “monetary and fiscal authorities” are responding.

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The Bank says before the outbreak, the global economy was showing signs of stabilizing, as projected in its January Monetary Policy Report (MPR).

“However, COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted,” said the Bank of Canada in a statement.

As a result, commodity prices have dropped and the Canadian dollar has depreciated. In turn, global markets are reacting to the spread of the virus by repricing risk across a broad set of assets and making financial conditions less accommodative.

The Bank predicts that if the virus spreads, it is likely business and consumer confidence will deteriorate, further depressing activity.

The Bank noted that Canada’s GDP growth slowed to 0.3% in the fourth quart of 2019, which was in line with its forecast, with consumption stronger than expected thanks to a healthy labour income growth, while residential investment continued to grow, albeit at a more moderate pace than earlier in the year. Meanwhile, both business investment and exports weakened.

However, the Bank of Canada says the first quarter of 2020 will be weaker than expected and the Canadian economy won’t grow as much as previously forecasted.

The bank pointed to disruptions in trade and business investments in addition to rail line blockades, strikes by Ontario teachers, and winter storms in some regions as reasons for dampening economic activity in the first quarter.

The bank also said it’s ready to further adjust its key rate if the situation calls for it.

“In light of all these developments, the outlook is clearly weaker now than it was in January,” the statement said. “As the situation evolves, governing council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

“While markets continue to function well, the Bank will continue to ensure that the Canadian financial system has sufficient liquidity.”

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