March 5, 2020 / 5:58 PM / a month ago

Bank of Canada sees rate cut cushioning the economic blow of coronavirus

TORONTO (Reuters) - The Canadian economy’s resilience could be “seriously tested” by a coronavirus outbreak but the Bank of Canada’s decision to cut a key interest rate this week should help soften the blow, Governor Stephen Poloz said on Thursday.

Bank of Canada Governor Stephen Poloz attends a luncheon for Women in Capital Markets (WCM) in Toronto, Ontario, Canada March 5, 2020. REUTERS/Chris Helgren

On Wednesday, the bank slashed the overnight rate by half a percentage point to 1.25% and said it was prepared to cut further if needed to help tackle the effects of the coronavirus, also known as COVID-19.

“We made a decision this week not to dip our toe in the water but rather make a decisive and clear move so that people get immediate impact... we believe we’ve done a lot there to cushion a blow,” Poloz told a news conference, adding that the level of international coordination was high.

Poloz reiterated the central bank’s readiness to cut further in a speech, saying the outbreak - the size and scope of which remains unknown - could hit consumer and business confidence.

“The Canadian economy has demonstrated good resilience in the past couple of years. That resilience could be seriously tested by COVID-19, however, depending on the severity and duration of its effects,” he told a Toronto business audience.

The Canadian dollar CAD=D4 weakened to as much as 1.3439 to the greenback, or 74.41 U.S. cents, after the governor's remarks.

The coronavirus is not the only challenge facing the Canadian economy these days, Poloz told reporters.

“We had more than enough reasons to adjust our policy without even bringing the virus into our deliberations,” he said, citing recent weaker-than-expected domestic data.

In addition to the outbreak, the effects of bad weather, rail blockades and a teachers strike in Ontario are expected to trigger another quarter of “very slow growth,” Poloz said, which could drag on into the second quarter.

“There is a real risk that business and consumer confidence will erode further, creating a more persistent slowdown, especially given recent declines in stock markets,” he said.

Money markets see about a 70% chance of another rate cut in April. [BOCWATCH]

The slide in commodity prices due to the virus and the resulting shock will delay the recovery in Canada’s already stressed oil-rich west, Poloz said.

“These stresses will inevitably find their way from commodity-producing regions into other parts of the country as those who are affected directly spend less money on everything.”

Reporting by Fergal Smith in Toronto, writing by Kelsey Johnson and David Ljunggren in Ottawa; Editing by Dan Grebler; Editing by Nick Zieminski

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