Business

Bank of Canada follows U.S. with half-point rate cut to soften blow of coronavirus

The Bank of Canada has announced a half-percentage point cut to its trendsetting interest rate amid economic concerns stemming from the novel coronavirus outbreak.

Bank rate reduction comes amid economic concerns over coronavirus outbreak

Bank of Canada governor Stephen Poloz announced a half-point interest rate cut Wednesday. (Chris Wattie/Reuters)

The Bank of Canada is cutting its key interest rate target by half a percentage point, dropping it to 1.25 per cent in response to the economic shock from the novel coronavirus outbreak.

The central bank says its target for the overnight rate is being trimmed because COVID-19, the disease caused by the virus, "is a material negative shock" to the country's economic outlook.

In a written statement about the announcement, the bank said that prior to the outbreak, Canada's economy had been operating "close to potential with inflation on target."

"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." 

In January, governor Stephen Poloz opened the door to a possible interest rate cut if weakness in the economy was more persistent than expected.

"In light of all these developments, the outlook is clearly weaker now than it was in January," the statement said.

"As the situation evolves, governing council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target."

WATCH | CBC's Scott Peterson explains why the cut was bigger than expected:

It's the first time the bank has cut rates since 2015. 2:47

First key rate cut since 2015

The cut in the bank's key rate is the first since the summer of 2015 and brings the rate to a level it hasn't been at since early 2018.

Economists had widely forecasted the bank would cut its rate following an unexpected half-point cut by the U.S. Federal Reserve on Tuesday to its rate as an emergency economic buttress against COVID-19 concerns.

That decision came after a call among central bankers and finance ministers from G7 countries, including Canada, about how to deal with the economic shocks the outbreak might have.

WATCH | Frances Donald of Manulife explains why the cut is both worrying and reassuring:

The dramatic rate cut suggests that Canadians might have reason to be worried about the economy, says Frances Donald of Manulife Investment Management.    4:02

"The Bank of Canada didn't wait to see the patient ailing before delivering a dose of preventative medicine," said CIBC economist Avery Shenfeld in a written statement, "but where it goes from here is a matter of epidemiology rather than economics."

The Bank of Canada generally finalizes its decision on rates by late Tuesday, meaning the call for its decision came after the U.S. Federal Reserve made its move.

Financial markets had expected at least one rate cut this year, but forecasts have pegged the decision Wednesday as the first of what could be multiple reductions to the central bank's key interest rate target.

Shenfeld said the central bank will be watching for news on both the virus and the economy, "but it's reasonable to assume a further 25 basis point [quarter percentage point] cut in April, with the rest of this year's story being dependent on which virus scenario plays out."

With files from CBC News