The Bank of Canada cut its key benchmark interest rate by 50 basis points Wednesday morning over concerns about what the coronavirus could do to the economy.
The 50 basis point cut brings the overnight rate to 1.25 per cent.
“Before the outbreak, the global economy was showing signs of stabilizing, as the Bank had projected in its January Monetary Policy Report (MPR). However, COVID-19 represents a significant health threat to people in a growing number of countries,” said the Bank of Canada in a release.
“In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted.”
The Bank of Canada expects business and consumer confidence to deteriorate further.
Canada’s central bank followed the U.S. Federal Reserve’s lead, which cut its rate by 50 basis points yesterday following a meeting of G7 finance minister and central bankers.
Australia and Malaysia’s central banks also cut their rates.
“The Bank continues to closely monitor economic and financial conditions, in coordination with other G7 central banks and fiscal authorities,” said the Bank of Canada.
Saw it coming
Avery Shenfeld, chief economist at CIBC Capital Markets, says the 50 bps cut was expected and since the U.S. went first it makes the Bank of Canada look less “panicky.”
“But the Bank wisely concluded that whatever outlook they previously had for Canada had deteriorated meaningfully given the global slowing, the hit to commodity prices, and the inevitable hit to confidence domestically,” said Shenfeld in a research note.
“A reasonable first step, with the Bank signalling that if things get worse, they are prepared to do more.
Shenfeld says the next steps depend on how the virus plays out, but a further 25 basis point cut in April is likely.
The last time the Bank of Canada changed its rate was a 25 basis point hike in October 2018.
Fuel for the housing market
Real estate markets in big cities like Toronto and Montreal were already heating up ahead of the typically busy spring buying season.
Fears over the COVID-19 outbreak were pulling fixed mortgage rates down, but now variable-rate mortgages are set to fall too after today’s announcement.
Christopher Alexander, executive VP at RE/MAX says today’s Bank of Canada interest rate cut will add fuel to hot housing markets such as Toronto. Which is good news if you’re a seller, less so for buyers.
“With home sales continuing to soar in the GTA as reflected in today’s TRREB market report, the Bank's rate decision will continue to pull more buyers into the market, which is good news in light of current global economic concerns,” Alexander told Yahoo Finance Canada.
“On the flip side, a boost in market activity, in combination with the housing shortage being experienced in many regions, will prompt greater competition and continued price growth as we look ahead to the coming months.
Poloz’s legacy
Bank of Canada Governor Stephen Poloz has been reluctant to cut rates, to keep the housing market from overheating and to keep a lid on household debt. Inflation has also been close to its target.
Poloz’s 7-year term as governor ends June 2nd.
“A wrinkle in the Bank's rate outlook is that Governor Poloz will be leaving the Bank just prior to the rate decision in June,” said Doug Porter, chief economist at BMO, said in a research note.
“Curiously, one more 25 bp cut to 1.0% would leave rates exactly where he found them when he first took the job in June 2013. There's a certain symmetry to that.”
The last time the Bank of Canada cut its rate was in 2015 to protect against shocks from falling oil prices.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.
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