It has been four years since Governor Stephen Poloz and his deputies on the Governing Council cut interest rates in response to a massive drop in oil prices. And like the economic impact from dropping oil prices – the coronavirus represents a similar threat.
Canada’s central bank prefers to use quarter-point moves in adjusting interest rates, however, this is an emergency, of sorts and the bank says the spread of the coronavirus represents a “material negative shock” to the Canadian and global outlooks.
“Governing council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target,” policymakers said in a statement, adding the move is part of a global response to the crisis. Poloz is due to speak Thursday in Toronto to provide insight into the decision. The bank’s next meeting is April 15.
The Financial Post is reporting that the Bank of Canada usually does not follow the U.S. Federal Reserve, but today, it did. Yet there is still some concern.
The central bank would have opted for a quarter-point cut, if not for the Federal Reserve. The reasoning is simple – Canadian households are already carrying too much debt, and lowering interest rates will stoke the demand for mortgages. Then, there is the possibility that too great a gap between the Fed and BOC interest rates could put undue pressure on Canada’s currency.
“It is becoming clear that the first quarter of 2020 will be weaker than the Bank had expected. The drop in Canada’s terms of trade, if sustained, will weigh on income growth. Meanwhile, business investment does not appear to be recovering as was expected following positive trade policy developments. In addition, rail line blockades, strikes by Ontario teachers, and winter storms in some regions are dampening economic activity in the first quarter,” said BOC in a statement.
