More rate cuts possible if coronavirus impact worsens, Poloz says

The Canadian economy’s resilience could be “seriously tested” by a coronavirus outbreak, depending on its severity and duration, Bank of Canada Governor Stephen Poloz said on Thursday.

Poloz spoke a day after the central bank slashed a key interest rate by half a percentage point and said it was prepared to cut further if needed to help tackle the effects of the coronavirus, also known as COVID-19.

“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 fell to 74.51 U.S. cents, after the governor’s remarks.

The economy was headed for another quarter of “very slow economic growth” which could drag on into the second quarter, Poloz said. As well as the outbreak, the economy is dealing with the effects of bad weather, rail blockades and a teachers’ strike in Ontario.

“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.

The central bank cut rates by 50 basis points to 1.25 per cent on Wednesday. Ahead of the speech, money markets saw about a 70 per cent chance of another cut in April. By the time the speech was done, those odds had jumped to a cut being a near certainty. The governor ended his speech by hinting more cuts are definitely on the table.

“As the COVID-19 situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target,” he said.

TD Bank economist Brian DePratto said the speech very much “reinforces that they remain ready to act again if needed.”

“The door to further easing is clearly open,” he said.

Commodity prices have dropped by more than 10 per cent and crude prices by close to 20 per cent since the outbreak began. The resulting shock will prolong the recovery in Canada’s already stressed oil-rich west, he 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,” he said.

Some commentators fretted that low rates could fuel already active housing markets. Poloz, though, said declining consumer confidence would likely reduce activity.

“In this context, lower interest rates will actually help to stabilize the housing market rather than contribute to froth,” he said.

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