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Several banks follow Bank of Canada, cut interest rates amid coronavirus concerns

COVID-19 coronavirus concerns spark Bank of Canada rate cut
The ongoing concerns about the COVID-19 coronavirus has prompted the Bank of Canada to cut its key rate. Catherine Urquhart has the details, and whether there might be more cuts to come.

The Bank of Canada cut its trend-setting interest rate by half a percentage point to 1.25 per cent down from 1.75 per cent on Wednesday in an effort to soften the economic impact of the COVID-19 outbreak.

The decision comes after the U.S. Federal Reserve implemented a similar cut on Tuesday, acting before its next scheduled policy meeting on March 17-18.

“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,” the central bank said in a statement.

How coronavirus is impacting the economy around the world
How coronavirus is impacting the economy around the world

Later Wednesday, several Canadian banks and financial institutions followed suit and dropped their prime lending rate by 50 basis points to 3.45 per cent, effective Thursday.

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The move was made by Royal Bank of Canada, Toronto-Dominion Bank, Scotiabank, Bank of Montreal, CIBC and the Desjardins Group. None of the announcements mentioned the coronavirus or the Bank of Canada’s earlier announcement.

While the traders and analysts had widely anticipated that Canada’s central bank would follow the U.S. lead, it’s unclear to what extent the rate cut will shore up sentiment among investors, markets and consumers.

The Fed’s surprise cut failed to trigger an immediate rebound in the stock market, with some analysts speculating that the emergency move might have further spooked investors.

READ MORE: Federal Reserve cuts rates in emergency move to stem coronavirus impact

Some economists are also questioning whether lower borrowing costs are the best antidote to the economic ailments brought on by coronavirus.

“Monetary policy is generally not highly effective in resolving supply-side shocks,” TD economist Beata Caranci wrote in a report on Monday. Fiscal policy, on the other hand, is effective “when targeted at the source of the supply shock,” she added.

Governments around the world are weighing spending measures aimed at blunting the effect of the health emergency.

On Tuesday, the United States, Japan, Germany, Britain, France, Italy and Canada gathered as the G-7 group of major world economies said in a joint statement they are “ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy.”

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On Wednesday, the World Bank said it is making $12 billion available to provide immediate support to low-income countries dealing with the health and economic impacts of the coronavirus.

Still, if quarantines spur a fear-based reaction among households, “then monetary policy needs to step in” in addition to fiscal policy, Caranci wrote.

The bank said it took action because COVID-19 has cut business activity in some regions and disrupted supply chains, hurting both commodity prices and the Canadian dollar.

“Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative,” the bank said. “It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.”

READ MORE: Toronto home sales in February up 45.6 per cent from year ago, TRREB says

Analysts also worry about what lower borrowing costs might do to a residential real estate sector that seems already poised for a hot spring housing market in some of Canada’s priciest cities.

The Toronto Regional Real Estate Board reported on Wednesday home sales in February were up a whopping 45.6 per cent compared with February of 2019, when they hit a decade low.

Still, some economists believe the Bank of Canada may have to lower rates even further.

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The average price of a home in Toronto climbed to $910,290, up from $779,791 in February last year, the board said.

“Clearly, the Bank is making a big tradeoff here, deciding that the risks of a virus-driven slowdown are much higher than the risks of a raging housing market,” BMO chief economist Douglas Porter wrote in a note to clients.

Canada’s central bank also signalled it may lower rates even further, saying it stands “ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

“It’s reasonable to assume a further [0.25 per cent] cut in April, with the rest of this year’s story being dependent on which virus scenario plays out,” CIBC economist Avery Shenfeld wrote shortly after the release.

“Where it goes from here is a matter of epidemiology rather than economics,” Shenfeld wrote.

— With files from Global’s Sean Boynton and the Associated Press