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Bank of Canada Interest Rate Decreases to 1.25%: March 2020

On March O4, 2020, the Bank of Canada interest rate decreased from 1.75% to 1.25% – a change of 50 basis points.

The Bank Rate is correspondingly 1.5% and the deposit rate is 1%.

Many economists had predicted a decrease of 25 basis points on March 4; however, the change was greater than expected.

“While Canada’s economy has been operating close to potential with inflation on target, the COVID-19 virus is a material negative shock to the Canadian and global outlooks, and monetary and fiscal authorities are responding,” the Bank of Canada (BOC) stated in a March 4 release.

The “significant health threat” of the COVID-19 virus (also known as the coronavirus) has led to business activities falling and global supply chain disruption. The BOC stated that as the virus spreads, it’s likely that business and consumer confidence will deteriorate as well.

While the global economy factored into the BOC decision, so did the local one. In Canada, the BOC stated that GDP growth slowed to 0.3% in 2019 Q4.

Consumer consumption was stronger than expected and labour income saw “healthy” growth.

Residential investment also continued to grow, though the BOC noted it was at a more moderate pace.

However, both business investment and exports weakened and do not appear to be recovering as expected.

“It is becoming clear that the first quarter of 2020 will be weaker than the Bank had expected,” the BOC said.

“In light of all these developments, the outlook is clearly weaker now than it was in January. As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

The Canadian interest rate change follows a cut by the U.S. Federal Reserve on March 3 of 50 basis points.

The next BOC interest rate announcement is scheduled for April 15, 2020.

Read the full text of the March 4 announcement here: https://www.bankofcanada.ca/2020/03/fad-press-release-2020-03-04/

See economist’s reactions to the BOC interest rate decrease from BNN Bloomberg: https://www.bnnbloomberg.ca/living-through-history-economists-react-to-the-bank-of-canada-s-rate-cut-1.1400042

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