Ottawa’s announcement of an $82-billion stimulus package for the Canadian economy stricken by paralysis brought about by the COVID-19 outbreak did not include a corresponding drop in interest rates, a move that has surprised some economists.
While federal finance minister Bill Morneau and and Bank of Canada governor Stephen Poloz said Wednesday all options are being considered in terms of fiscal policy solutions, the interest rate - as of now - stays at 0.75% after the regularly scheduled decision on March 13 to drop the rate from 1.25%.
The next scheduled decision date is April 15, but that may be too far away for a Canadian economy now also dealing with a closed border with the United States (albeit with trade still allowed to continue), said Bryan Yu, deputy chief economist at Central 1 Credit Union.
“We do expect them to move another 50 basis points to 0.25%,” Yu said. “That will be, in our view, the next move, and we still think it will come ahead of the next scheduled rate announcement… We actually thought they’d be cutting by now, and we are not clear why exactly they are not currently matching the U.S. rates. We do still expect it to happen soon, however.”
In an emergency move on Sunday, the U.S. Federal Reserve said it is cutting its target interest rate near zero - in order to avoid a credit crunch and the related market disruptions that happened 10 years ago during the global financial crisis. That was the last time the U.S. Federal Reserve cut rates to near zero.
Bank of Canada, meanwhile, has largely maintained interest rates at 1.75% since 2018 until March 4, when it first lowered the rate to 1.25% before the March 13 drop.
One of the reasons to keep new interest rate decisions on hold as of now, Yu said, may be because the Canadian economy may face further bad news stemming from COVID-19, requiring further stimulus.
One such example, he said, was the announcement this morning that the Big-3 U.S. auto manufacturers - General Motors, Ford, and Fiat Chrysler - will close all U.S. production plants for an unknown period.
“At this point, I think [Bank of Canada] are saying they still want to maintain a level of stability in the market and try perhaps to not look like they are panicking,” Yu said, noting the U.S. interest rate announcement itself caused a negative response from market because of poor communication.
“I think we are going to be seeing some more negative news on the COVID-19 front,” he added. “So when we think about ammunition in terms of what type of policies will be required, with all the moving parts in place, they [the Bank of Canada] are trying to keep at least something in the barrel, perhaps… What we are seeing right now is a coordinated approach to monetary fiscal policy in order to shore up the economy during this period.”
