Bank drops overnight benchmark rate to 1.25%
As was widely expected, the Bank of Canada announced that it is dropping its benchmark interest rate by 50 basis points. The Bank’s overnight interest rate target currently sits at 1.25 per cent, down from 1.75 per cent. Despite Canada’s economy and inflation both hovering at expected levels, the Bank cites global and Canadian economic shocks due to coronavirus concerns.
The next interest rate announcement is scheduled on April 15, 2020. Read the release below:
Before the outbreak, the global economy was showing signs of stabilizing, as the Bank had projected in its January Monetary Policy Report (MPR). However, COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted. This has pulled down commodity prices and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.
In Canada, GDP growth slowed to 0.3 percent during the fourth quarter of 2019, in line with the Bank’s forecast, although its composition was different. Consumption was stronger than expected, supported by healthy labour income growth. Residential investment continued to grow, albeit at a more moderate pace than earlier in the year. Meanwhile, both business investment and exports weakened.
It is becoming clear that the first quarter of 2020 will be weaker than the Bank 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 was expected following positive trade policy developments. In addition, rail line blockades, strikes by Ontario teachers, and winter storms in some regions are dampening economic activity in the first quarter.
CPI inflation in January was stronger than expected, due to temporary factors. Core measures of inflation all remain around 2 percent, consistent with an economy that has been operating close to potential.
In light of all these developments, the outlook is clearly weaker now than it was in January. As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target. While markets continue to function well, the Bank will continue to ensure that the Canadian financial system has sufficient liquidity.
The Bank continues to closely monitor economic and financial conditions, in coordination with other G7 central banks and fiscal authorities.