MNI DATA IMPACT: Text of BOC Decision to Cut 50bps to 1.25%>

By Greg Quinn

     OTTAWA (MNI) - Text of the BOC decision released Wednesday from 

Ottawa: 

     The Bank of Canada today lowered its target for the overnight rate 

by 50 basis points to 1.25 percent. The Bank Rate is correspondingly 1.5 

percent and the deposit rate is 1 percent. 

     While Canada's economy has been operating close to potential with 

inflation on target, the COVID-19 virus is a material negative shock to 

the Canadian and global outlooks, and monetary and fiscal authorities 

are responding. 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. In consequence, 

business activity in some regions has fallen sharply and supply chains 

have been disrupted. This has pulled down commodity prices and the 

Canadian dollar has depreciated. Global markets are reacting to the 

spread of the virus by repricing risk across a broad set of assets, 

making financial conditions less accommodative. It is likely that as the 

virus spreads, business and consumer confidence will deteriorate, 

further depressing activity. 

     In Canada, GDP growth slowed to 0.3 percent during the fourth 

quarter of 2019, in line with the Bank's forecast, although its 

composition was different. Consumption was stronger than expected, 

supported by healthy labour income growth. Residential investment 

continued to grow, albeit at a more moderate pace than earlier in the 

year. Meanwhile, both business investment and exports weakened. 

     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. 

     CPI inflation in January was stronger than expected, due to 

temporary factors. Core measures of inflation all remain around 2 

percent, consistent with an economy that has been operating close to 

potential. 

     In light of all these developments, the outlook is clearly weaker 

now than it was in January. As the situation evolves, Governing Council 

stands ready to adjust monetary policy further if required to support 

economic growth and keep inflation on target. While markets continue to 

function well, the Bank will continue to ensure that the Canadian 

financial system has sufficient liquidity. 

     The Bank continues to closely monitor economic and financial 

conditions, in coordination with other G7 central banks and fiscal 

authorities. 

     Information note: The next scheduled date for announcing the 

overnight rate target is April 15, 2020. The next full update of the 

Bank's outlook for the economy and inflation, including risks to the 

projection, will be published in the MPR at the same time. 

BELOW IS THE PREVIOUS STATEMENT FOR COMPARISON:

     The Bank of Canada today maintained its target for the overnight 

rate at 1.75 percent. The Bank Rate is correspondingly 2 percent and 

the deposit rate is 1.50 percent. 

     The global economy is showing signs of stabilization, and some 

recent trade developments have been positive. However, there remains a 

high degree of uncertainty and geopolitical tensions have re-emerged, 

with tragic consequences. The Canadian economy has been resilient but 

indicators since the October Monetary Policy Report (MPR) have been 

mixed. 

     Data for Canada indicate that growth in the near term will be 

weaker, and the output gap wider, than the Bank projected in October. 

The Bank now estimates growth of 0.3 percent in the fourth quarter of 

2019 and 1.3 percent in the first quarter of 2020. Exports fell in late 

2019, and business investment appears to have weakened after a strong 

third quarter. Job creation has slowed and indicators of consumer 

confidence and spending have been unexpectedly soft. In contrast, 

residential investment was robust through most of 2019, moderating to a 

still-solid pace in the fourth quarter. 

     Some of the slowdown in growth in late 2019 was related to special 

factors that include strikes, poor weather, and inventory adjustments. 

The weaker data could also signal that global economic conditions have 

been affecting Canada's economy to a greater extent than was predicted. 

Moreover, during the past year Canadians have been saving a larger share 

of their incomes, which could signal increased consumer caution. This 

could dampen consumer spending but help to alleviate financial 

vulnerabilities at the same time. 

     Looking ahead, Canadian business investment and exports are 

expected to contribute modestly to growth, supported by stronger global 

activity and demand. The Bank is also projecting a pickup in household 

spending, supported by population and income growth, as well as by the 

recent federal income tax cut. In its January MPR, the Bank projects the 

global economy will grow by just over 3 percent in 2020 and 3-1/4 

percent in 2021. For Canada, the Bank now forecasts real GDP will grow 

by 1.6 percent this year and 2 percent in 2021, following 1.6 percent 

growth in 2019. 

     While the output gap has widened in recent months, measures of 

inflation remain around 2 percent. This is consistent with an economy 

that, until recently, has been operating close to capacity. The Bank 

expects inflation will stay around the 2 percent target over the 

projection horizon, with some fluctuations in 2020 from volatility in 

energy prices. Meanwhile, labour markets in most regions have little 

slack and wages continue to firm. 

     In determining the future path for the Bank's policy interest rate, 

Governing Council will be watching closely to see if the recent slowdown 

in growth is more persistent than forecast. In assessing incoming data, 

the Bank will be paying particular attention to developments in consumer 

spending, the housing market, and business investment. 

     Information note: The next scheduled date for announcing the 

overnight rate target is March 4, 2020. The next full update of the 

Bank's outlook for the economy and inflation, including risks to the 

projection, will be published in the MPR on April 15, 2020. 

--MNI Ottawa Bureau, +1-613-314-9647, greg.quinn@marketnews.com

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