The Bank of Canada is cutting its key interest rate target by half a percentage point, dropping it to 1.25% in response to the economic shock from the novel coronavirus outbreak.
The central bank said Wednesday that it cut its target for the overnight rate because Covid-19, as the virus is named, was “a material negative shock” to this country’s economic outlook.
In January, the central bank said the global economy was showing signs of stabilizing, but governor Stephen Poloz opened the door to a possible interest rate cut if weakness in the economy was more persistent than expected.
In a statement Wednesday, the Bank of Canada said it is becoming clear the Canadian economy won’t grow as much as previously forecasted for the first quarter of this year.
The central bank pointed to disrupted supply chains and rattled business and consumer confidence as well as rail line blockades, job action by Ontario teachers and harsh winter weather.
The statement also said the central bank may 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.”
The cut in the bank’s key rate is the first since the summer of 2015 and brings the rate to a level it hasn’t been at since early 2018.
Economists had widely forecasted the bank would cut its rate following an unexpected half-point cut by the U.S. Federal Reserve on Tuesday to its rate as an emergency economic buttress against Covid-19 concerns.
That decision came after a call among central bankers and finance ministers from G7 countries, including Canada, about how to deal with the economic shocks the outbreak might have.
The Bank of Canada generally finalizes its decision on rates by late Tuesday, meaning the call for its decision came after the U.S. Federal Reserve made its move.
Financial markets had expected at least one rate cut this year, but forecasts have pegged the decision Wednesday as the first of what could be multiple reductions to the central bank’s key interest rate target.
In a research note Thursday, CIBC Capital Markets chief economist Avery Shenfeld called the move “a reasonable first step,” with the central bank signalling it’s prepared to do more if necessary.
“The Bank of Canada didn’t wait to see the patient ailing before delivering a dose of preventative medicine, but where it goes from here is a matter of epidemiology rather than economics,” he wrote.
The bank “wisely concluded” that its previou outlook “had deteriorated meaningfully given the global slowing, the hit to commodity prices, and the inevitable hit to confidence domestically.”
Shenfeld said it’s reasonable to assume a further 25 basis point cut in April.