MNI POLICY: BOC Cuts 50bps to 1.25%, Ready to Act Further>

By Greg Quinn and Anahita Alinejad

     OTTAWA (MNI) - The Bank of Canada cut its benchmark interest rate 

by 50bps to 1.25% Wednesday and said it's ready to act further if the 

spread of coronavirus further depresses activity. 

     The reduction is the biggest since the global financial crisis a 

decade ago and larger than the 25bps MNI economist median, though three 

respondents said a 50bps move was coming. It came the day after G7 

officials said they would coordinate action and the Fed then moved 

alone with an unscheduled 50bp cut, suggesting pressure on the rest of 

the group to respond as well.

     "Governing Council stands ready to adjust monetary policy further 

if required to support economic growth and keep inflation on target," 

the group led by Governor Stephen Poloz said in a one-page statement 

from Ottawa. "The Bank continues to closely monitor economic and 

financial conditions, in coordination with other G7 central banks and 

fiscal authorities." 

     References to future action are rare for Poloz who prefers letting 

markets make their own decisions rather than be guided by code words 

from policy makers. That raises chances the BOC will cut again at the 

next meeting on April 15. The mention of fiscal firepower also suggests 

Finance Minister Bill Morneau may increase deficit spending in or before 

a budget due in the next few weeks. 

     The BOC's statement was filled with the negative consequences from 

the spread of the coronavirus, saying the economy would be weaker than 

expected again in the first quarter because of supply chain disruptions 

and reduced confidence. Growth already stalled late last year on weak 

investment and trade, and the BOC's move blunts the risk Canada's dollar 

could become too strong for an export-dependent economy. 

     "The outlook is clearly weaker now than it was in January," the BOC 

said. "It is likely that as the virus spreads, business and consumer 

confidence will deteriorate, further depressing activity."

     "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," the BOC said.  

     The OECD on Monday warned the global economy may contract in the 

first quarter and pared its 2020 growth forecast on coronavirus risk, 

adding the U.S. and Canada have the least reason to cut because of their 

lesser ties to China. 

     Investment has also been weaker than expected following the 

resolution of some trade tensions, the BOC said. Policy makers also 

dropped any reference to record consumer debts they said earlier were a 

big reason to avoid an insurance rate cut, because of the potential 

cost later to the economy.

     The central bank's mandate is to keep inflation at 2%, and core 

measures remain around that mark, "consistent with an economy that has 

been operating close to potential" the central bank said.

     The BOC hasn't cut interest rates since 2015 during an oil slump, 

and had since raised rates several times through October 2018 as the 

economy moved towards full output. 

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

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