Effects of COVID-19
The Bank of Canada has lowered its overnight rate target to 1 ¼%. The deposit rate now stands at 1% while the Bank rate is similarly 1 ½ %. This is due to the COVID-19 virus which has caused business activities in some regions to fall unexpectedly disrupting supply chains. Before the outbreak, Canada’s economy was performing close to satisfactory with inflation on target. Even though the bank lowered the rate by 50 basis points, the COVID-19 virus turns out to be a negative shock to Canadian and international economic outlook. Commodity prices have gone down and the Canadian dollar continues to depreciate which has prompted monetary and fiscal authorities to respond. The COVID-19 virus continues to pose a serious threat to consumers in a growing number of countries.
According to the Bank’s January Monetary Policy Report (MPR), the international economy was showing signs of stabilizing. However, as the virus continues to spread, the financial conditions are becoming less accommodative. The international market is reacting to the spread of the COVID-19 by repricing risk across a wide range set of assets. If the virus is left unchecked, business and consumer confidence will continue to deteriorate, crushing activity. In the fourth quarter of 2019, consumption was stronger than projected, backed by robust labor income growth. However, Canada’s GDP growth rate slowed to 0.3%, which was in line with the Bank of Canada’s forecast, even though its composition was different. Residential investment has continued to increase while business investment and exports are declining. It is now apparent that the first quarter of 2020 will not be stable as the Bank had projected earlier. If the drop in Canada’s terms of trade continues, it will slow down income growth. Meanwhile, strikes by Ontario teachers, rail line blockades, and winter storms in some areas are likely to have some dampening effect on economic activity in the first quarter. The Country’s economy has been performing close to potential partly because the consumer price index (CPI) inflation in January was slightly better than projected, and core measures of inflation remain at approximately 2 %. Considering all these changes, the economic outlook is not as good as it was in January. To alleviate this problem, the Governing Council should be ready to regulate monetary policy to keep inflation on target and support economic growth. Even though the market is operating well, the Bank should ensure that the country’s financial system has enough liquidity. The bank should continue to monitor financial and economic situations, in coordination with other G7 monetary authorities and central banks. The effects of the COVID-19 virus may take months before the country notices the peak of the shock from the virus on the Canadian economy. Though more cases are still coming up and this can bring a negative impact on economic activity, economists believe the impact of COVID-19 will be relatively short, probably a matter of months.
The announcement for the next overnight rate target will be made on April 15, 2020. We will publish the next complete update of the Bank’s outlook for inflation and economy, including risks to the economic projection.