Interest rate cut as virus hits economy

Government pledges to work 'in concert' with companies side-swiped by circumstances

The Bank of Canada slashed a key interest rate Wednesday in a bid to blunt the economic impact of the spread of COVID-19 even as Prime Minister Justin Trudeau warned that a slowdown is already taking hold.

"We are currently seeing an impact on the global economy," Trudeau said Wednesday, citing disrupted supply chains because of the virus' impact in China and a downturn in travel and tourism.

"We're seeing a slowdown," the prime minister said during a visit to St-Jérôme, Que.

Federal Finance Minister Bill Morneau has said the government is looking at contingency measures to support the economy but that it was too soon to say whether such steps will be needed.

But Trudeau on Wednesday suggested that an economic hit is inevitable, noting that some industries are already facing "challenging situations."

He pledged that Ottawa would work "in concert" with companies side-swiped by the impact.

"We're continuing to work extremely hard to counter the impacts on our economy that the virus will be bringing," he said.

As part of its response, the government announced a new cabinet committee to oversee its response to the virus, including the health and economic impacts. The committee will be chaired by Deputy Prime Minister Chrystia Freeland and includes Public Safety Minister Bill Blair, Health Minister Patty Hajdu, Morneau and Melanie Joly, whose economic development portfolio includes tourism.

The news came the same day the Bank of Canada lowered its target for the overnight rate by 50 basis points to 1.25 per cent and said it's prepared to take further action "if required."

That matches Tuesday's rate cut by the U.S. Federal Reserve.

Explaining its decision, the bank said that while Canada's economy has been operating close to its potential, the virus is a "negative shock" to the economic outlook.

"Business activity in some regions has fallen sharply and supply chains have been disrupted.

"This has pulled down commodity prices and the Canadian dollar has depreciated," the bank said.

"It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity," it said.

Avery Shenfeld, managing director and chief economist of CIBC Capital Markets, said that some impacts are already being felt, such as depressed commodity prices. But Shenfeld expects that consumers and businesses will become more cautious in their spending given the uncertainty, one likely factor in the Wednesday's rate decision.

"The Bank of Canada is clearly judging that it's coming and coming soon," he said of the possible spending slowdown.

With new cases being reported in the United States and European countries working to contain the virus, Shenfeld cautioned that policy makers simply can't predict how much further it will spread, making it impossible to predict the economic effects.

"Nobody knows, including the Bank of Canada, but it's already clear it's a material hit to growth and warranted an attempt to provide some offset to the Canadian economy," he said in an interview.

The rate cut is not a cure-all for the looming economic clouds, but will help boost confidence and encourage spending, he said.

"It's not a vaccine and it's not a medication that is going to cure people who are ill. Nor will it get people out of quarantine," Shenfeld said.

"But those people who are not quarantined or in cities that aren't as affected by the disease will be encouraged to spend a little more and we need all of that," he said.

The Bank of Canada noted that the impact of the virus only adds to other factors that were already weighing on the Canadian economy, such as the rail line blockades that have halted freight shipments and ongoing strikes by Ontario teachers.

"In light of all these developments, the outlook is clearly weaker now than it was in January," the bank said.

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This article was written by Bruce Campion-Smith from The Toronto Star and was legally licensed by AdvisorStream through the NewsCred publisher network.