Bank of Canada expected to cut interest rate over coronavirus

Staff and visitors walk past a sign indicating to wash hands on the elevator doors at the Jewish General Hospital in Montreal, Quebec, Canada March 2, 2020. REUTERS/Christinne Muschi

Bets are rolling in that the Bank of Canada will have to cut its benchmark interest rate on Wednesday because of the economic risks COVID-19 poses.

The U.S. Federal reserve jumped the gun today, by not waiting for its next policy meeting for a 50 basis point cut after a meeting of G7 finance ministers and central bankers.

Unlike the Fed, which has been steadily easing, the Bank of Canada has been reluctant to cut rates.

Today’s announcement along with the economic fallout of the outbreak — including a 30 per cent drop in the price of oil — is widely expected to force Governor Stephen Poloz’s hand.

Investors were betting on a 25 basis point cut. But after the U.S. central bank move, the odds of a 50 basis point cut are higher.

Avery Shenfeld, chief economist at CIBC Capital Markets, says he’s not surprised by the 50 basis point cut, but the Fed not waiting a couple of weeks for the next meeting got his attention.

“That rare move underscores the depths of their concern on where the economy is headed as U.S. cases emerge and the virus spreads in more export markets,” he said in a note.

“For the Bank of Canada, it’s now a no brainer that they too will be cutting rates this week, and while that won't be an inter-meeting move, it certainly opens the door to the Bank of Canada delivering 50 basis points.”

Shenfeld expects another cut of 25 basis points in April.

(Yahoo Finance)

COVID-19 trumps data

Nathan Janzen and Josh Nye, senior economists at RBC, also expect a cut followed by another in April.

They say things that are going right with the Canadian economy will likely be overshadowed by fears of COVID-19 spreading.

They note wage growth is around 3 per cent and inflation is close to being on target. Consumer confidence and business confidence actually improved in February during the outbreak.

Even a strong jobs report on Friday could bounce right off of Poloz.

“We expect next week’s Canadian labour market report to show a small increase in jobs alongside a tick up in the unemployment rate but driven by higher labour force participation,” said Janzen and Nye, in a research note last week.

“Any upside surprise in the normally volatile employment numbers will probably be discounted by forward-looking coronavirus concerns, while any downside surprise will only reinforce expectations for the BoC to continue to ease policy.”

The Bank of Canada’s overnight rate has been 1.75 per cent since October 2018, when it hiked by a quarter-point.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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