By Gloria Galloway
TORONTO (MaceNews) – The Bank of Canada governor says the decision this week to slash interest rates amid the spread of a new coronavirus was aimed at bolstering consumer confidence and maintaining stability in financial markets and the housing sector.
The virus COVID-19 is combining with other factors to create a Canadian economic outlook that is much weaker than it was in January, Stephen Poloz told a Women in Capital Markets luncheon on Wednesday, in a speech he admitted had been hastily rewritten to explain the rate drop announced a day earlier.
Canada’s target overnight rate was cut by 50 basis points to 1.25 per cent, the largest single rate cut made by the Bank of Canada since 2009. That led to a corresponding reduction in Canada’s Bank Rate which now stands at 1.5 percent, and in the deposit rate which is now 1 per cent.
“The global economy will, at the very least, be significantly disrupted by COVID-19 in the first half of the year,” Poloz told the gathering. “It is possible that the global economy will snap back quickly after health professionals have managed the situation and conditions have returned to normal. However, the outbreak and its effects could be more persistent. Consumer and business confidence could be set back for a longer period of time, causing economic growth to slow more persistently. This could include longer-term layoffs, for example. At this point, we simply do not know.”
The virus has already disrupted the Chinese economy significantly and is having ripple effects around the world as supply chains are impacted, said Poloz. Travel is being affected, he said, and there could be more persistent effects created by eroding consumer and business confidence.
That is being amplified in Canada by other issues, including an early winter that left some crops to rot in the fields, railway shutdowns, and the closure of the General Motors plant in Oshawa.
“We can hope that all of these factors prove to be temporary, but it seems that we are headed for at least another quarter of very slow economic growth,” said Poloz. “Since it is already March, these factors could easily affect the second quarter. 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.”
World prices of commodities have dropped by more than 10 percent and oil prices by close to 20 percent since the start of the year.
Combined with the fallout of COVID-19, said Poloz, the Bank decided “that the downside risks to the economy today are more than sufficient to outweigh our continuing concern about financial vulnerabilities. Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market. In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to froth.”
In response to a question from Mace News at a news conference after the luncheon speech, Poloz said the Bank has no control over the extent to which the virus will disrupt production or force workers to stay home, but it can provide a safety net by reducing mortgage costs. The Bank is taking action in concert with the government of Canada, he said, “to cushion the blow for the most vulnerable people.”