By Kelsey Johnson and David Ljunggren
OTTAWA (Reuters) – The Bank of Canada slashed its benchmark interest rate to 1.25% from 1.75% on Wednesday in the face of a coronavirus outbreak and said it was prepared to cut again if needed to support growth.
The central bank said the outbreak was “a material negative shock” to the Canadian and global outlooks and predicted that as the coronavirus spread, business and consumer confidence would deteriorate, further depressing economic activity.
“As the situation evolves, (the Bank’s) Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target,” the bank said in a statement.
Money markets quickly priced in a roughly 77% chance of another 25 basis point cut on April 15, when the bank is scheduled to unveil its next rate decision. [BOCWATCH]
“It’s tough to get any upside out of this … to be cutting 50 (basis points) and saying they stand ready to adjust monetary policy further. That’s a clear cue that they’re not done,” said Derek Holt, vice president of capital markets economics at Scotiabank.
The Canadian dollar fell to 1.3416 to the U.S. greenback, or 74.54 U.S. cents, down from 1.3358, or 74.86 U.S. cents.
The move marked the first time in almost five years that the bank had eased rates. The last time it cut by 50 basis points was in March 2009 during the global financial crisis.
The U.S. Federal Reserve cut rates by half a percentage point in an emergency move on Tuesday.
“With the Fed cutting by 50 yesterday it really did paint the bank into a corner … I think the base case needs to be at least 25 basis points in April,” said Andrew Kelvin, chief Canada strategist at TD Securities.
Canada has only reported a handful of people with the coronavirus.
“It is likely that as this virus spreads, business and consumer confidence will deteriorate,” the bank said, noting the Canadian dollar and commodity prices have depreciated. The bank had held rates steady since October 2018.
Canada is a major exporter of oil, which has seen prices slump in recent months.
The bank said it was becoming clear the first quarter would be weaker than it had expected.
“The drop in Canada’s terms of trade, if sustained, will weigh on income growth. Meanwhile, business investment does not appear to be recovering as expected,” it said.
(Additional reporting by Fergal Smith and Moira Warburton in Toronto and Steve Scherer in Ottawa; Editing by Steve Orlofsky)