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Bank of Canada lowers overnight rate at second 2020 meeting

This morning, the Bank of Canada lowered its target for the overnight rate by 50 basis points to 1.25 percent from 1.75 percent.

This is the first time the benchmark rate has changed since October 24, 2018.

Comparing the Bank’s two most recent statements (today and January 22, 2020), we find several notable new comments:

  • It is “becoming clear that the first quarter of 2020 will be weaker than the Bank had expected” when CPI inflation was “stronger than expected”
  • While Canada’s economy has been operating close to potential with inflation on target, “the COVID-19 virus is a material negative shock to the Canadian and global outlooks”
  • COVID-19 “represents a significant health threat to people in a growing number of countries” and in some regions, business activity has fallen sharply, supply chains have been disrupted, commodity prices have been pulled down and the Canadian dollar has depreciated
  • The drop in Canada’s terms of trade, if sustained, will weigh on income growth
  • Business investment “does not appear to be recovering as was expected following positive trade policy developments”
  • Although markets continue to “function well,” the Bank of Canada will continue to ensure that the Canadian financial system has sufficient liquidity

As a result of its revised near-term outlook, the Bank’s Governing Council noted that it “stands ready” to adjust monetary policy further if required to support economic growth and keep inflation on target.

BoC’s next policy announcement is set for April 15, 2020 and in the ensuing period the Bank’s Governing Council intends to coordinate with other G7 central banks and fiscal authorities as it “closely” monitors economic and financial conditions. We will closely monitor these conditions as well.