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Canada Monetary Policy March 2020

Canada: Bank of Canada cuts rates amid a moderating growth outlook in March

On 4 March, the Bank of Canada (BoC) cut its target for the overnight rate from 1.75% to 1.25%, following the U.S. Fed’s unplanned meeting on 3 March where Governor Powell lowered the federal funds rate by 50 basis points.

The Bank’s decision to cut its key policy interest rate was driven by fears related to the coronavirus outbreak. The virus, which has spread across a large number of countries in recent weeks, poses a significant downside risk to the global growth outlook via its impact on confidence levels and household spending, as well as disruption to global supply chains. Moreover, markets are repricing risk across a broad range of asset classes globally, leading to tighter financial conditions, further suppressing global growth prospects. The Bank therefore followed suit of other key central banks, mainly the U.S. Federal Reserve, which cut its target range on 3 March.

Nevertheless, inflation remained above the midpoint of the Central Bank’s target range for the third consecutive month in January (2.4%), while the BoC noted the economy continues to run close to potential.

In its communiqué, the Bank was noticeably more dovish, highlighting a clear moderation in the economic outlook since its January report. Moreover, the Bank made no mention to household indebtedness and noted domestic economic conditions in the first quarter appear to be weak, particularly due to temporary setbacks. Lower-than-expected business investment levels also kept the Bank wary of the economic prospects.

Commenting on March’s meeting, Brain DePratto, a senior economist at TD economics, noted:

“Ultimately then, we cannot rule out another rate cut next month. Market and consumer sentiment are likely to remain challenged, and with markets pricing further easing south of the border, the risks associated with not following up with more easing are high.”

The next monetary policy meeting is scheduled for 15 April.

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