BoC follows Fed's lead, cuts interest rates amid coronavirus fears

Coronavirus economy

The coronavirus continues to rear its head in the economy, prompting the Bank of Canada to cut key interest rates by half a percentage point. 

“The Bank of Canada didn’t wait to see the patient ailing before delivering a dose of preventative medicine,” said Avery Shenfeld, chief economist at CIBC Economics in a note to investors. “But where it goes from here is a matter of epidemiology rather than economics.”

The interest rate dropped to 1.25% on Wednesday. This move followed the U.S. Federal Reserve which made an emergency 50-basis-point cut to interest rates the day before.

“The COVID-19 virus is a material negative shock to the Canadian and global outlooks,” said the central bank in a press release.

However, the coronavirus wasn’t the only reason to cut rates. Slower GDP growth, rail blockades, Ontario teachers’ strikes and winter storms have also dampened economic activity in the first quarter, which contributed to the decision to cut rates, according to the Bank of Canada .

Josh Nye, senior economist at RBC Economics, says the move at this stage is more likely to shore up financial market sentiment and support business and consumer confidence than offset demand and supply shocks related to the outbreak.

Shenfeld said it’s reasonable to assume a further 25-basis-point cut in April, depending on what happens with the coronavirus.