MNI PREVIEW: Big Canada Banks See BOC Cut Wed on Virus Damage

--Coronavirus Adds To Risk of Prolonged Slowdown

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada will likely cut the G7's highest interest

rate of 1.75% on Wednesday as coronavirus damage to the global economy threatens

a domestic slowdown, according to a majority of the country's biggest lenders

surveyed by MNI.

     Royal Bank and CIBC switched their calls to a quarter-point cut through the

weekend on signs the outbreak will disrupt global trade, and Toronto-Dominion

said Monday its forecast for a hold is under review. Bank of Nova Scotia and

National Bank Financial also predict a cut.

     The decision due 10am Wednesday comes with the Fed and BOJ signaling they

are prepared to act and the OECD predicting coordinated moves if the outbreak

worsens. Governor Stephen Poloz in January said the door was open to cutting on

signs domestic spending faded in the fourth quarter. The virus and railway

blockades last month mean there's little chance of the substantial rebound early

in 2020 that policy makers were counting on.

     "The Bank of Canada can no longer say that events are proceeding in line

with their forecast," CIBC chief economist Avery Shenfeld wrote in a note Monday

as he changed his call, adding both the BOC and Fed will need to cut 75bps this

year. "While a rate cut is far from an ideal weapon, it couldn't hurt."

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

raised rates several times through October 2018 as the economy moved towards

full output. The question now is whether weaker growth creates enough slack to

threaten Poloz's inflation target.

     --DOOR OPEN TO CUT

     "I'm not saying that the door isn't open to an interest rate cut,

obviously, it is, it is open," he told reporters at a January press conference.

"But it hinges on how the data evolve from here, because our base case we have a

strong belief that this will prove temporary, but temporary could be longer or

shorter." The overall dynamics of how the economy evolves determine if the

slowdown is persistent, he said, with policymakers focused on consumer spending,

housing and investment.

     Statistics Canada reported Friday that GDP matched the BOC's 0.3%

annualized forecast, which was the slowest since mid-2016. The BOC also said

growth would quicken to faster than 1% in the first quarter, a view challenged

by an OECD report Monday saying global output may contract in that period. 

     The case for holding is the lack of hard data proving an economy that sends

three-quarters of its exports to the U.S. will be derailed by the much smaller

ties to China. Poloz has said gains from any insurance cut must be weighed

against the cost later of inflaming record consumer debt burdens.

     While foreign trade has been weak, inflation of 2.4% is above the BOC's 2%

target and unemployment has held near record lows. Even the fourth-quarter GDP

report offered some solace with consumer spending up 2%, and the quarter ended

with a 0.3% December gain that was the best since May and beat the MNI median of

0.1% on gains in energy and transportation. 

     The global drag appears poised to overwhelm the prospects of a rebound from

fourth-quarter weakness driven by some one-offs including railway and auto

worker strikes and a ruptured oil pipeline. 

     "The bank is likely to want to lean against any deterioration in

confidence," Royal Bank deputy chief economist Dawn Desjardins wrote in a

research note Friday. 

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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