The central bank should accommodate the widespread anxiety over a possible pandemic
Just a few days before the Bank of Canada’s March 4 meeting, the Monetary Policy Council of the C.D. Howe Institute called on the institution to lower its benchmark policy interest rate to 1.5%.
Seven out of the 10 MPC members encouraged the BoC to lower the overnight rate target to 1.5% this week. The remaining three members did not call for any adjustments.
Additionally, majority of the Council (six out of 10) called on the central bank to implement another cut during its next announcement in April, with the resulting 1.25% to be held until early 2021. He remaining four called for an April target of 1.5%.
By around Q3 2020, the target should be either 1% (one MPC member), 1.25% (six members), or 1.5% (three members).
A major factor influencing the downward movement is the potential economic and fiscal impacts of the highly infectious COVID-19 – a point that Scotiabank vice president and deputy chief economist Brett House also highlighted late last week.
“Most members emphasized its negative implications for demand, citing sharp declines in equity markets and commodity prices, and downgraded forecasts for growth in many Asian and European economies,” the MPC stated.
“At this point, it is impossible to know how large and long-lasting these effects will be, but their implications for Canadian exports and consumer and business confidence are clearly negative. Several MPC members emphasized that financial market participants expect central banks to cut their policy rates – an expectation reflected in declining longer-term interest rates – and that the Bank of Canada should validate that expectation.”
There is still some leg room for the BoC, however, considering that the national housing and labour markets are enjoying sustained robustness.
“Combined with the possibility that some factors contributing to weak growth in late 2019 and early 2020 were temporary, the group tended to feel that the Bank of Canada need not cut more than 25 basis points next week, and that it could await confirmation of some of the negative influences from abroad before cutting further,” the MPC concluded.
