Bank of Canada’s Overnight Interest Rate Cut by 50 Basis Points to 2-Year Low

March 4, 2020

Today’s decision predictably follows the Fed’s easing by a day and represents a trend reversal in interest rates. The last five overnight rate changes in July 2017, September 2017, January 2018, July 2018 and October 2018 were hikes of 25 basis points each, and the last cut happened in the summer of 2015. The new rate level of 1.25% may not represent the floor. “The outlook is clearly weaker now than it was in January. As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

The Bank of Canada’s statement of explanation for today’s easingĀ  calls the covid-19 pandemic “a material negative shock” to supply chains and both business and consumer confidence. A harsh winter and some recent labor market unrest are also mentioned, and investors’ reassessment of asset risk had resulted in less accommodative financial conditions than when policymakers last reviewed policy on January 22. Canada’s terms of trade has fallen, business investment has failed to rebound as was assumed, and the recent rise of inflation is deemed due to temporary factors.

The last time that Canada’s interest rate was changed by an increment of more than 25 basis points happened exactly 11 years and one day ago when on March 3, 2009 it was sliced to 0.5% from 1.0%.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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