Canada’s central bank has recently cut half a percentage point from its benchmark interest rate in order to try and help the economy survive the effects of coronavirus outbreak.
The move will ease the monetary policy for the first time in over four years, and the bank made it in order to try and protect the local economy from the new virus outbreak.
The overnight rate was cut down from 1.75% to 1.25%, as the coronavirus spreading represents a material negative shock to the global, as well as Canada’s own outlooks. However, the bank’s officials confirmed that the rate would be reduced further if the current rate cuts turn out to be insufficient.
The policymakers stated that the new decision is a part of a global response to the coronavirus crisis, adding that “Governing council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”
Bank of Canada’s policy rates are the highest in developed countries
A similar cut was already introduced earlier by the US Federal Reserve. In Canada, however, the rate cut comes as a slight surprise, as the Governor Stephen Poloz continuously resisted lowering borrowing costs for years, which left the country with the highest policy rate in advanced economies.
Policymakers explained that the 50-basis-point cut was necessary as the outlook is currently much weaker than it was in January of this year. Meanwhile, Poloz will speak in Toronto later today, to provide further insight into the decision.
While the virus has had a major impact on economic activity in some regions by disrupting supply chains and increasing risk, Manulife Investment Management’s chief economist, Frances Donald, still believes that a 50-basis-points cut is quite a strong message from the bank of Canada.
It shows that its officials are very concerned about downside risks. However, despite the cut, the Bank of Canada still has the highest policy rate among the Group of Seven countries.