Coronavirus: Canada cuts rates for first time since 2015

Michel COMTE
The Bank of Canada has lowered its key lending rate for the first time in nearly five years in response to the coronavirus epidemic

Canada's central bank on Wednesday cut its key lending rate by 50 basis points to 1.25 percent in response to the growing economic risk posed by the coronavirus epidemic.

The interest rate drop was the first in Canada since mid-2015, and followed a similar move on Tuesday by the US Federal Reserve and after G7 finance ministers and central bankers pledged a coordinated response to the virus.

"While Canada's economy has been operating close to potential with inflation on target, the COVID-19 virus is a material negative shock to the Canadian and global outlooks, and monetary and fiscal authorities are responding," said the Bank of Canada.

The central bank also signaled that it stands ready if required to further cut rates in the coming months "to support economic growth and keep inflation on target."

Analysts welcomed the announcement, but warned it was unlikely to be a panacea for the Canadian economy.

"It may support sentiment temporarily, but it will do little to offset the fear-driven economic damage from COVID-19," said ING chief international economist James Knightley, warning of a possible economic contraction in the second quarter.

"The Bank of Canada didn't wait to see the patient ailing before delivering a dose of preventative medicine, but where it goes from here is a matter of epidemiology rather than economics," added CIBC Economic's Avery Shenfeld.

The central bank said the global economy had been showing signs of stabilizing prior to the outbreak. But the novel coronavirus has become "a significant health threat" to people in several countries.

Across the world, around 3,200 people have died from the virus. More than 94,000 have been infected in 81 countries and territories, according to AFP's latest toll based on official sources.

- Weaker than expected -

As a consequence of containment efforts by health authorities, business activity in several regions of the world has fallen sharply and supply chains have been disrupted, dragging down commodity prices as well as the Canadian dollar.

The Bank of Canada said, after financial markets recently plummeted, business and consumer confidence was likely to deteriorate further as the virus spreads.

It noted that Canada's economy had slowed as expected in the last three months of 2019.

Consumption was stronger than expected, supported by wage hikes, but business investment and exports weakened and did not appear to be recovering.

In addition to the virus, rail line blockades by indigenous protestors, strikes by Ontario teachers and winter storms were dampening economic activity.

"It is becoming clear that the first quarter of 2020 will be weaker than the bank had expected," it concluded.

The bank's key lending rate had remained unchanged since October 2018, as inflation held relatively steady at close to the bank's 2.0 percent target and unemployment fell to a near-record low set in the 1970s.

Its last 50 basis point cut was in 2009, after the bank rapidly lowered interest rates through 2008 in response to the global financial crisis.

The Canadian economy is expected to grow by 1.6 percent this year, matching last year's gross domestic product (GDP), which had slowed from 2.0 percent growth in 2018.

The figure has not yet been updated to reflect coronavirus impacts on the economy.