Bold Rate Cut Signals Unease About Economic Growth Prospects
March 4, 2020
Focus Areas—Canadian Economics
The Conference Board of Canada’s Senior Economist Robyn Gibbard offers the following insights on today's Bank of Canada announcement:
“The Bank of Canada made a surprise double cut to its overnight rate this morning, bringing it from 1.75 to 1.25 per cent. In many ways this is a pre-emptive cut to draw a line under the economic fears we have seen over the past two weeks.”
- The Bank of Canada cut its overnight rate by 0.5 percentage points to 1.25 per cent this morning. The last time we saw a cut of this magnitude was during the financial crisis. The Bank’s move this morning follows a similar decision yesterday by the U.S. Federal Reserve to also cut their rate by 50 basis points.
- Even after the Fed cut yesterday, it wasn’t certain that the Bank would cut rates. Core inflation measures came in between 1.8 and 2.2 per cent in January, right on target. This morning’s double cut is therefore a bit of a shock. Its impact was amplified further by the Bank’s notice that future rate cuts are also on the table.
- In addition to COVID-19, the Bank noted other sources of economic risk. GDP figures for the final quarter of 2019 show that the economy grew by just 0.3 per cent at annualized rates, and the Bank says it was particularly worried to see falling business investment.
- The Bank’s last Monetary Policy Report, published in January, projected growth of 0.3 per cent in the first quarter of 2020. In this morning’s release it now says growth will be weaker than that thanks to rail blockades and strikes by Ontario teachers.
- The Bank used the first two paragraphs in its release this morning to talk about the economic disruption being caused by the COVID-19 virus. In parts of China, industrial production was put on pause, reducing demand (and prices) for raw materials. Elsewhere, governments have imposed travel bans and businesses have rushed to cancel normal travel and gatherings.
- The next scheduled rate decision is April 15, 2020. At this point it seems that further rate cuts could follow this year. The large rate cut this morning and the dovish tone of the statement show that the Bank is clearly worried about global growth prospects and what that means for Canada’s economic outlook.