Search ForexCrunch

Bloomberg News reports that the Bank of Canada is poised to follow the US Federal Reserve and cut interest rates in the face of rising coronavirus concerns. An interest rate cut this week would mark the first Bank of Canada action since October 2018, when it raised rates.

Lead paragraphs

All odds point to Governor Stephen Poloz lowering interest rates by at least 25 basis points on Wednesday after global coronavirus fears spooked markets and sent oil prices tumbling. Canada’s central bank has managed to hold rates steady for almost 16 months, resisting a global easing trend. Now, after the Fed made an emergency half-percentage point interest rate cut Tuesday morning, Poloz may have no choice but to join in.

It’s a dramatic change from a month ago, when the most likely scenario was that Poloz would be able to keep the benchmark rate unchanged at 1.75 per cent for the last few meetings before his term ends in June. Markets are now pricing in 75 basis points of cuts by the time he steps down.

Reasons for Holding

The article notes that a strong labour market and near-target inflation have given Poloz some reason not to cut.

Another reason to hold off until April is that the decision comes without the broader analysis included in a Monetary Policy Report. The federal government budget, expected later this month, may also provide some additional stimulus that monetary policy makers would want to incorporate into their decision making.

“The rapid spread of COVID-19 globally, deterioration in financial conditions, steep drop in oil prices, not to mention continued transportation disruptions domestically are collectively too much for the Bank of Canada to ignore,” wrote National Bank Financial economist Warren Lovely in a note.