Immediate worry of COVID 19 spurred Bank of Canada rate cut, Poloz says
By The Canadian Press
Canada’s top central banker says concerns about the immediate impact of the novel coronavirus spurred the Bank of Canada to cut its trend-setting interest rate this week.
Governor Stephen Poloz said Thursday in the luncheon speech that worries about the downside risks to the economy today outweighed continuing concerns that cutting rates would fan financial vulnerabilities in Canada, such as high household debt.
First cut since 2015
The half a percentage point reduction of the bank’s key rate target to 1.25 per cent marked the first cut since the summer of 2015 and brought the rate to its lowest level since early 2018.
Among the effects of the outbreak are weakened commodity prices that Poloz said will add to tough times in oil-producing regions, before likely spreading the financial hit elsewhere as people affected “spend less money on everything.”
He said a drop in rates could stabilize the housing market, instead of contribute to froth, if a slide in consumer confidence reduces activity.
Poloz left the door open to further rate cuts should the economic circumstances require it.
“The downside risks to the economy today are more than sufficient to outweigh our continuing concern about financial vulnerabilities,” he said, based on a text of his speech released in Ottawa.
The economy may snap back if things quickly return to normal, he said, but warned the situation could be more persistent and include longer-term layoffs.
“At this point, we simply do not know,” he said.
Many of the implications and responses to COVID-19 lie beyond the bank’s control, Poloz said, but added that a rate cut can buffer effects on consumer and business confidence to bridge tough times.
Remove hurdles for hiring
He suggested federal policy-makers find ways to remove hurdles that make it hard for workers to match up with available positions, of which there are half a million in the country, to strengthen the labour market.
The unknowns about the virus have rattled financial markets, disrupted global supply chains and shuttered factories in China, where the outbreak began, that many Canadian businesses rely on for inventories.
Worries about catching COVID-19 could also depress consumer spending, which the economy relies on.
Add into the mix a slowdown in the fourth quarter of 2019, rail blockades, unusual winter weather and job action by Ontario teachers and the outlook for growth over the first quarter of this year is weaker than previously forecasted.
“Since it is already March, these factors could easily affect the second quarter,” Poloz said.
“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.”
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