The Bank of Canada and the U.S. Federal Reserve cut rates in support of the global economy

March 5, 2020 Wesley Blight

As most expected, the Bank of Canada (BoC) decided to cut interest rates this month. In line with the surprise 0.5% cut from the U.S. Federal Reserve (Fed) on March 3rd – which leaves its target rate range at 1.00%-1.25% – the BoC has also cut their overnight rate by 0.5% to 1.25%.

In what feels like a coordinated effort to provide support to the global economy following the spread of the coronavirus (COVID-19), the interest rate cuts come as the outlook for global growth has worsened since January. The virus has not only disrupted global travel, but global financial markets as well. Its influence has reduced both demand and supply as business and consumer confidence has weakened, and production has been hampered by temporary labour shortages (mainly in China).

The BoC already opened the door at the beginning of the year to potential rate cuts based on weaker than expected near-term growth in Canada – while growth was still positive, confidence was weakening amid geopolitical tension, slowing net exports, and lacklustre business investment.

The spread of coronavirus has changed global market conditions

Before the outbreak, the global economy was showing signs of stabilizing as projected in the BoC’s January Monetary Policy Report. Since then, the virus’ impact has driven commodity prices, the Canadian dollar and capital asset prices lower.

The drop in oil prices (WTI is down 23% since January’s peak) and the already weakened business investment and export data from the end of last year were key considerations for the BoC decision. Some of the rationale included in the announcement such as the rail line blockades, strikes, and winter storms are clearly temporary factors. The BoC will look through these issues but are likely mentioning them now as first quarter 2020 economic data will likely be materially worse than previously expected.

As I mentioned in this Financial Post article, the rate cuts will help provide some confidence to markets which have been reeling since the escalation of the coronavirus situation.

Managing future economic growth

It’s also worth noting that the rate cuts are part of a continuing global effort to ease financial conditions. Since mid-2019, central banks have been easing policy rates in support of future global economic growth and, while further easing is expected in the immediate short-term, its impact will be delayed as it takes time for stimulus to work its way through the economy.

The BoC ended its announcement stating that it remains ready to adjust monetary policy further if needed to support economic growth. Furthermore, that it will continue to monitor global economic and financial conditions in coordination with its G7 counterparts.

We’ve been proactively positioned for further easing

Our portfolios have been proactively positioned for monetary policy easing. While no material changes will be made to our strategy as a result of the BoC and the Fed decisions to lower rates, we did recently make some tactical asset allocation adjustments based on the changing market conditions resulting from the coronavirus outbreak as outlined by my colleague Ian Taylor in his most recent update. We will continue to assess all the aforementioned factors in the context of the still-developing coronavirus situation.

As always, please don’t hesitate to reach out to your MD Advisor* with any questions about interest rates, the impact on your investments, or your portfolio.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).

About the Author

Wesley Blight

Wesley Blight, CFA, CIM, FCSI, is an Assistant Vice President with the Multi-Asset Management team at MD Financial Management. He is responsible for the investment results of the firm’s fixed income and multi-asset products.

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