- The Bank of Canada cut its policy interest rate by 50 basis points to 1.25% this morning (was: 1.75%). Echoing their U.S. counterparts, the risks related to COVID-19 were front and center.
- Much of the accompanying statement was given over to virus-related developments and risks. An otherwise stabilizing global outlook gave way to falling business activity and disrupted supply chains. This is not to mention the significant repricing of risk globally that has tightened financial conditions.
- Even ignoring the virus shock, domestic conditions were beginning to look less favourable. The Bank notes that first quarter growth will likely disappoint their prior 1.3% growth expectation, and that business investment has not met their expectations of recovery in the wake of positive trade policy developments.
- With no mention of household indebtedness or financial stability risks more broadly, this is clearly an organization focused on managing the near term risks to economic growth.
- How quickly things change. As the spread of COVID-19 continues, the risks to the global and domestic economic outlooks have mounted, and the Bank of Canada has now joined several of its global peers in easing monetary policy in response. The Bank sent an unequivocally dovish signal today, focused almost entirely on risks and with no mention of household indebtedness. Perhaps most telling is the statement that they “stand ready” to adjust further should conditions warrant, and are focused on ensuring liquidity remains ample.
- It is important to remember that monetary policy is only one part of the overall response toolkit, and arguably the least effective given its relatively blunt nature. Most important in managing this sort of shock will be the fiscal response. We expect to see targeted measures to support those individuals and industries most affected by the virus and its attendant disruptions, with past experiences such as natural disasters providing a rough template. Recent statements by both the Prime Minister and Finance Minister suggest that such measures are forthcoming.
- This is not to dismiss the importance of the monetary policy channel. There was an important message sent today that the relevant authorities are ready and willing to act to support economic activity in the face of negative shocks. And, as much as lower rates will further fan the flames of housing markets, the key five year interest rate is in large part beyond the Bank of Canada’s control, reflecting global factors such as the Federal Reserve’s shock 50 basis point cut yesterday (and market expectations of further cuts south of the border).
- Ultimately then, we cannot rule out another rate cut next month. Market and consumer sentiment are likely to remain challenged, and with markets pricing further easing south of the border, the risks associated with not following up with more easing are high. As discussed in our latest Dollars and Sense, when it comes to monetary policy, sometimes the concrete risks today outweigh the theoretical risks tomorrow.