Virus Rate Cut Could Open Poloz’s Bank of Canada Finale
Coronavirus Rate Cut Could Open Poloz’s Finale at Bank of Canada
(Bloomberg) -- Governor Stephen Poloz is poised for a dramatic farewell at the Bank of Canada before his departure in June.
Investors are now betting the Bank of Canada will cut at least 25 basis points from its benchmark interest rate on Wednesday, swaps trading shows. Some are even calling for a 50 basis-point reduction.
That’s in line with aggressive rate cuts expected globally in coming weeks, amid mounting concern about the spread of the coronavirus. Since Friday, the leaders of central banks in the U.S., Japan and U.K. have pledged to act if necessary to ensure stability in financial markets. Economists at Goldman Sachs Inc. said Sunday a co-ordinated global monetary response might be in order.
“There is a significant possibility of coordinated cuts and that’s why people are thinking 50” basis points by the Bank of Canada, Mark Chandler, head of fixed income research at Royal Bank of Canada, said by phone Monday.
Futures markets are now pricing in a total of 61 basis points worth of reductions over the final three decisions of Poloz’s tenure -- a startling change in expectations in a matter of days. Only two weeks ago, economists were still debating whether Poloz would end his term without a move and leave any decisions to his successor.
Fourth-Quarter Stall
There was already weakness in Canada’s economy even before recent events. Output essentially stalled in the final quarter of last year, and the virus adds to a long list of impediments that could push Poloz into his first reduction of borrowing costs since mid-2015.
Unlike its Group of Seven peers, Canada resisted the worldwide trend to easier monetary policy -- but that resistance looks to be fading fast.
Economists have been slower to adjust their predictions than the market. As of Monday at 10:10 a.m., 12 of 28 respondents in a Bloomberg survey predict the bank will hold rates steady this week. Some shops including Royal Bank of Canada, Canadian Imperial Bank of Commerce and National Bank Financial have flipped their forecasts, and others may follow.
The Bank of Canada has kept its benchmark rate at 1.75% for 10 consecutive meetings, leaving the country with the tightest monetary policy among advanced economies. Poloz seemed comfortable with a wait-and-see stance throughout 2019, largely due to a robust labor market and inflation near target. However, communications shifted in January to a more dovish stance as incoming data pointed to softer conditions.
Now risks are piling up. The weakened Canadian economy must contend not only with the coronavirus, but also multiple pipeline protests that had ground rail transport to a halt, neither of which have been accounted for in the data. Analysts have already begun to lower growth expectations for 2020.
For Poloz, whose commitment to data dependency has become a hallmark of his tenure, a decision to cut rates this week would mean acting before the central bank updates its economic forecasts in April. Still, getting ahead of impending economic shocks isn’t out of character.
In his first policy move, Poloz unexpectedly cut rates in January 2015 to counter the impact of collapsing oil prices. And in last October’s rate decision, it was revealed governing council discussed and subsequently dismissed the need for an insurance cut that would get ahead of the impacts of rising trade tensions.
One reason policy makers may forgo a cut Wednesday is that the decision comes without the broader analysis included in a Monetary Policy Report. The central bank under Poloz has only moved the interest rate once in a non-MPR meeting, in September 2017.
Poloz, however, is due to speak on Thursday at 1 p.m. in Toronto and could take the opportunity to elaborate on the central bank’s thinking.
To contact the reporter on this story: Erik Hertzberg in Ottawa at eschmitzhert@bloomberg.net
To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier, Stephen Wicary
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