Bank of Canada takes cue from Fed and others, slashes rates over coronavirus fears

(C) Reuters. FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa

By Kelsey Johnson and David Ljunggren

OTTAWA (Reuters) – The Bank of Canada, taking its cue from other central banks, slashed a key interest rate by the most in more than a decade on Wednesday to help tackle a coronavirus outbreak and said it would cut again if necessary.

The bank lowered its benchmark overnight rate to 1.25% from 1.75%, prompting money markets to price in a better than even chance of another reduction next month.

Since last Friday, the world’s top bankers have reassured markets they would try to head off the impact of the coronavirus. The U.S. Federal Reserve and the Reserve Bank of Australia both cut rates on Tuesday.

The Bank of Canada said the outbreak was “a material negative shock” to the Canadian and global outlooks and predicted that as it spread, business and consumer confidence would deteriorate, further depressing economic activity.

“As the situation evolves, (the Bank’s) Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target,” the bank said.

“The Bank continues to closely monitor economic and financial conditions, in coordination with other G7 central banks and fiscal authorities.”

The move marked the first time in almost five years the bank had eased rates. The last time it cut by 50 basis points was in March 2009 during the global financial crisis.

The Canadian dollar fell to 1.3416 to the U.S. greenback, or 74.54 U.S. cents, down from 1.3358, or 74.86 U.S. cents.

“We are seeing an economic slowdown. There will be an impact and we are there to find a solution,” Canadian Prime Minister Justin Trudeau told reporters in Saint-Jerome, Quebec ahead of the rate decision.

Money markets quickly priced in a roughly 55% chance of another 25 basis point cut on April 15, when the bank is scheduled to unveil its next rate decision. [BOCWATCH]

“It’s tough to get any upside out of this … to be cutting 50 (basis points) and saying they stand ready to adjust monetary policy further. That’s a clear cue that they’re not done,” said Derek Holt, vice president of capital markets economics at Scotiabank.

Canada has only reported a handful of people with the coronavirus.

“It is likely that as this virus spreads, business and consumer confidence will deteriorate,” the bank said, noting the Canadian dollar and commodity prices have depreciated. The bank had held rates steady since October 2018.

Finance Minister Bill Morneau on Tuesday said he was prepared to act quickly to help companies hurt by the coronavirus and would not need to wait for the next budget, which is usually unveiled in March.

Nathan Janzen, senior economist at the Royal Bank of Canada, said he expected the budget would contain fiscal measures to address the effects of the outbreak.

Canada is a major exporter of oil, which has seen prices slump in recent months.

The Bank of Canada said it was becoming clear first quarter annualized growth would be weaker than the 1.3% it forecast on Jan 22.