MNI REVIEW: BOC Seen Cutting Again by April on Virus Risk

--Poloz Speech Thursday May Update Comment He's Prepared to Act Again

--BOC Cut Wednesday of 50bps Was Biggest Since Financial Crisis

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada is likely to cut rates again at the next

meeting April 15 to follow up on a 50bp reduction Wednesday as global damage

from Covid-19 takes hold, former officials told MNI.

     Governor Stephen Poloz and his deputies said the outbreak threatens to

depress spending more and they are "ready to adjust monetary policy further if

required," a break from past practice of avoiding forward guidance. Officials

also said they will remain in close touch with G7 counterparts, while investors

are looking for more action following the Fed's unscheduled 50bps reduction on

Tuesday.

     Canada's economy was already at risk of nearly stalling again in the first

quarter before China's outbreak and the virus leaves little prospect of the

risks returning to balance. The BOC also referenced potential fiscal policy

action in the weeks before Finance Minister Bill Morneau is due to present a

budget, a sea change from a few weeks ago when policy makers were pointing to

strengths such as record low unemployment.

     "There's an explicit recognition things were slowing even before the

virus," said Jean-Francois Perrault, chief economist at Bank of Nova Scotia in

Toronto and a former senior official at the BOC and finance department. "There's

no attempt to distinguish between a supply shock and a demand shock" like some

officials abroad, he said, and the statement "clearly sets up additional

easing."

     Perrault had expected the 50bps reduction while a larger group of

economists in an MNI survey predicted a 25bp move, and he said the bigger action

helped make sure financial conditions stayed loose. Some U.S. markets rallied

and then gave back gains after the Fed's cut yesterday. Matching the Fed's rate

cut blunts the risk of a Canadian dollar rally that could further undercut the

nation's export-reliant economy.

     BMO, CIBC, Capital Economics, National Bank and RBC also say another rate

decrease is likely by the next meeting April 15. Investors will get an update

Thursday with a speech by the governor in Toronto released at 12:45pm EST

followed by a press conference.

     --SUPPLY CHAIN DISRUPTIONS

     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. "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."

     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 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. Even with today's cut Canada retains the title of the G7's

highest interest rate, with the Fed close at a range of 1-1.25%.

     The BOC must be cautious about further cuts given the long-run danger of

indebted households, said Thorsten Koeppl, a former BOC special adviser who now

teaches at Queen's University in Ontario.

     "The world is on fire-- it makes sense that the Bank of Canada falls into

line," he said. "They are also thinking that they need to do more."

     Koeppl likened the move to firing at a tiger in the jungle in hopes of

scaring it away, and said such a move may have already backfired on the Fed.

Moving fast may scare the tiger away but it also leaves the BOC exposed later,

he said.

     "They must clearly think about the demand side effects," of more easing, he

said.

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

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