Bank of Canada rate cut increasingly likely amid coronavirus fears, economists say

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The Bank of Canada may announce an interest rate cut at its next meeting on Wednesday, a growing number of economists say.

The central bank has kept rates steady since Oct. 24, 2018, but analysts believe its next move will likely be a cut as the economy faces a number of headwinds including the COVID-19 outbreak, dropping oil prices and transport disruptions.

RBC economists are now forecasting a cut of a quarter of a percentage point, from 1.75 per cent to 1.50 per cent, at the Wednesday meeting.

“The plunge in global equity markets and sharp drop in commodity prices, in particular oil, are bumping up the risks that the confidence hit in financial markets will be mirrored in household and business sentiment,” RBC deputy chief economist Dawn Desjardins wrote in a memo on Friday.

On Feb. 28, U.S. and Canadian financial markets ended what turned out to be the worst trading week since the financial crisis of 2008 amid fears that a coronavirus pandemic will trigger a global recession.

Stocks bounced back sharply on both sides of the border on Monday, as investors’ focus turned to news that governments and central banks would step in to prop up the economy.

READ MORE: Wall Street opens higher but TSX edges lower after worst trading week since the financial crisis

The Dow Jones Industrial Average surged more than 700 points, while the benchmark S&P 500 climbed 2.2 per cent, placing it on track for its best day since January 2019, as of 1:57 p.m. ET. The S&P 500 is coming off a weekly loss of 11.5 per cent.

Canada’s S&P/TSX composite index also clawed back some of the lost ground, rising 174 points, or 1 per cent, to 16,440 as of 1:45 p.m. ET.

The recent market jitters come on top of an already shaky economic performance for Canada. Growth slowed to an annualized rate of 0.3 per cent in the last three months of 2019, the worst performance in almost four years, thanks in part to rail strikes, bad weather and pipeline shutdowns, Statistics Canada said on Friday.

Coronavirus fears are also affecting commodity markets, with oil prices tanking around 15 per cent last week on fears that a global slowdown would reduce the world’s demand for oil. On Monday, benchmark U.S. crude was up US$1.89 to US$46.65 per barrel. Brent, the international standard, rose US$1.88 to US$51.55.

An interest rate cut by the Bank of Canada could help boost investors’ moods and shore up confidence among consumers and businesses, Desjardins wrote.

BMO economists are calling on the central bank to cut rates for a quarter of a percentage point at its April 15 meeting, with another such move in June. However, “if markets continue to melt down over the next few days, the odds might just tilt toward a March cut,” BMO economist Robert Kavcic wrote in a note to clients on Monday morning.

A rate cut in Canada could come as part of a concerted effort by central banks around the world to contain the economic impact of the coronavirus health scare.

The International Monetary Fund and World Bank announced simultaneously Monday that they are ready to help countries affected by the coronavirus through their emergency lending programs and other tools.

“We will use our available instruments to the fullest extent possible,” said IMF managing director Kristalina Georgieva and World Bank President David Malpass in a joint statement. “International co-operation is essential.”

The statement echoed similar promises to act if necessary from some central banks, starting with the Federal Reserve on Friday and the Bank of Japan over the weekend. Some analysts now speculate that the Fed could cut rates sometime this week, before its next formal meeting March 17-18.

Traders have priced in a 100 per cent probability that the Fed will cut rates by a half-percentage point during or before its March meeting.

Goldman Sachs is forecasting sharp interest rate cuts by central banks in the U.K., Australia, India and South Korea, in addition to Canada and the U.S.

Also, the Organisation for Economic Co-operation and Development, a research organization made up of mostly advanced economies, cut its world growth forecast in a report Monday.

The OECD said that even if there are only limited outbreaks outside China, the global economy will grow just 2.4 per cent this year, the weakest since the financial crisis in 2009. That forecast matches several private estimates.

If other countries are hit with outbreaks similar to China’s, growth could fall as low as 1.5 per cent, the OECD said.

The JP Morgan Global Manufacturing index posted the steepest drop last month since the recession year 2009. The index plunged to 47.2, lowest since May 2009, pulled down by cratering production in China.

Two new surveys showed a sharp drop in Chinese manufacturing in February as anti-virus controls shut down the world’s second-largest economy, but companies are confident activity will revive following government stimulus efforts.

Given that the main economic impact so far of the virus outbreak is on the supply side of economies rather than on the demand side, questions are being asked as to whether looser monetary policy will have any meaningful impact.

“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.

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

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