“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 BOC said Wednesday, in the statement accompanying a 50bps rate cut.
It’s the latest move by policymakers to drown a biological threat in liquidity and/or subject a virus to death by a thousand rate cuts. It’s an inherently futile effort, but, as the few strategists still willing to give central banks the benefit of the doubt have been keen to point out, monetary policy needs to do its part, even if all that can be accomplished is reducing the odds of credit events and keeping the vaunted “wealth effect” from slamming into reverse as stocks careen lower.
The BOC’s statement goes into a bit more detail on the global economic impact the bank sees from the outbreak. To wit:
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.
The statement closes with a pledge that Canada will continue to cooperate with other G7 central banks.
The 50bps move from the BOC is larger than expected (although it’s hardly a total surprise – 43bps was priced in).
Canadian yields fell in the knee-jerk, as did the loonie.
If you’re wondering whether there’s more where this came from, it’s certainly possible.
“In light of all these developments, the outlook is clearly weaker now than it was in January”, the BOC said. “As the situation evolves, Governing Council stands ready to adjust monetary policy further if required”.
Are you listening virus?!