Expectations of a Bank of Canada interest-rate cut this week have rapidly moved from unlikely to imminent as global governments and central banks begin to respond en masse to the escalating economic threat from the COVID-19 virus.
With Canada’s top central bankers in closed-door deliberations for Wednesday’s regularly scheduled interest-rate decision, bond-market indicators show traders have now fully priced in a quarter-percentage-point cut in the Bank of Canada’s key overnight rate, to 1.5 per cent from 1.75 per cent. A week ago, market pricing indicated only 30-per-cent odds of a cut.
The expectation follows a week of deep losses in financial markets and plunging prices for oil and other key commodities as the global spread of the virus widened – and fears spread even faster. Economists are convinced the bank now has little choice but to reduce its key interest rate on Wednesday, to lean its weight against a rising tide of worry that could break Canadian business and consumer confidence – and drag the economy down.
“We got this added layer, with all this uncertainty,” Royal Bank of Canada deputy chief economist Dawn Desjardins said. “It becomes more of a sentiment thing … saying, ‘We’re going to move quickly to provide any support we can, so that consumers will feel emboldened … or that businesses would put some money to work.’ ”
Momentum is building among leading governments and central banks to take action that economists say could involve some combination of monetary easing and fiscal stimulus.
The U.S. Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan all issued statements signalling that they are preparing to ease monetary policy to support the economy. The Group of Seven finance ministers, including Canada’s Bill Morneau, will hold a conference call on Tuesday to discuss what French Finance Minister Bruno Le Maire called “concerted action” to mitigate the global economic impact of the outbreak of coronavirus, which began in China, and causes a disease known as COVID-19.
“Minister Morneau is in regular discussions with our international partners on this matter,” Mr. Morneau’s press secretary, Maéva Proteau, said via e-mail. “Our government’s strong fiscal position means we continue to have all the necessary tools to respond in cases of continued fluctuations in the domestic and global markets.”
The response from global policy makers helped soothe investors and stock markets rebounded sharply Monday. Toronto’s S&P/TSX Composite Index rose nearly 2 per cent, while the U.S. benchmark S&P 500 index surged nearly 5 per cent.
The Bank of Canada has said nothing, but is in the midst of its usual one-week silent period before its rate announcement. Wednesday’s decision will be accompanied by a brief statement outlining the central bank’s rationale, which usually runs only a few paragraphs. Markets and the general public will have to wait for a more detailed explanation on Thursday, when Governor Stephen Poloz gives an economic update speech and news conference in Toronto.
The Bank of Canada hasn’t cut interest rates since the 2015 oil shock. Last fall, the bank decided against a rate cut, even as most of its global peers eased monetary policy amid fears about the U.S.-China trade war. At the time, the Bank of Canada explained that given high levels of household debt, the risks of reducing interest rates outweighed the case for a so-called “insurance” cut.
Yet even before pandemic fears rocked financial markets, many economists had felt the Bank of Canada might be headed toward a rate cut in April or June, as an already-tepid growth outlook was hindered further by virus-related disruptions, weak commodity prices and rail blockades. The growing concern over COVID-19 has made the case for a cut more urgent by the day.
“The evidence from the west coast of the U.S. over the weekend makes it apparent that there has been fairly widespread infection with the coronavirus in that region … making a spread within Canada inevitable,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a note to clients. “The Bank of Canada can no longer say that events are proceeding in line with their forecast.”
Interest rates aren’t considered particularly effective against economic shocks such as pandemics that are, at their root, disruptions of supplies rather than weakness in demand. However, economists said the collapse in investor sentiment has sent a strong warning that central bankers may need to ease rates to reassure consumers and businesses, and help calm frenzied markets.
“Lower rates can’t do much, but they can boost sentiment and buy time for governments to get a fiscal response together,” said Elsa Lignos, global head of foreign exchange strategy at RBC Capital Markets in London.
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David Parkinson