Economists are calling for the Bank of Canada to cut the overnight lending rate on Wednesday as fears around the coronavirus’s economic impact increase.
In a research note on Monday, CIBC Capital Markets chief economist Avery Shenfeld wrote that Covid-19 cases on the U.S. West Coast make the virus’s spread within Canada “inevitable.”
A rate cut is “far from an ideal weapon” but it couldn’t hurt, he wrote, especially since the Federal Reserve has signalled its intent to cut the overnight rate.
Federal Reserve Chair Jerome Powell said Friday that the U.S. central bank would “act as appropriate to support the economy” in the face of risks posed by the coronavirus after stock markets saw their worst week since 2008. The Fed’s next rate decision is March 18. (Editor’s note: At 10 a.m. ET today, the Fed cut its benchmark interest rate by 50 basis points — the first time the central bank has cut its key rate between policy meetings since the 2008 financial crisis.)
The Bank of Canada waiting until April to lower the 1.75% rate “would look out of sync with the evidence,” Shenfeld wrote. CIBC is looking for a quarter-point cut this week, another cut in April, and a 75-basis-point reduction for the year. It’s expecting the same from the Fed, which already cut rates three times last year.
The C.D. Howe Institute’s Monetary Policy Council said the central bank should cut this week and again in April, holding at 1.25% until 2021, citing concerns about the coronavirus.
“At this point, it is impossible to know how large and long-lasting these effects will be, but their implications for Canadian exports and consumer and business confidence are clearly negative,” a report from the council said.
Declining long-term interest rates show that markets expect central banks to cut, the report said, and “the Bank of Canada should validate that expectation.”
In a report on Monday, Scotiabank vice-president and head of capital markets economics Derek Holt also called for Bank of Canada cuts this week and in April. He cited developments in the domestic economy as reasons for cutting, but that the virus has increased the chances.
“The BoC needs to cut and was arguably already behind the curve before the coronavirus emerged as a rising threat,” Holt wrote.
In a late-January interview, CIBC Economics managing director and deputy chief economist Benjamin Tal said the central bank may resort to cuts this year to boost economic activity and consumer spending.
“Companies are unwilling to invest,” he said, in a Jan. 27 interview. “And the consumer is clearly not there. So the short answer is that the economy will not perform extremely strongly in 2020.”
Canada’s economic growth slowed to 0.3% in the fourth quarter of 2019, the worst quarter in three years.
Canadian debt levels remain high. The ratio of Canadian household debt to income increased to 175.9% in Q3 2019, from 175.4% in Q2, according to Statistics Canada. This ratio is the percentage of gross monthly income that goes toward paying debt.
But while debt levels are high, the level at which debt is accumulating is low, according to Tal.
“Credit in Canada is rising at the slowest rate in any non-recessionary period,” he said. “Namely, you have to be in a recession in order to see household credit rising so slowly.”
He noted this is a result of policy changes, as well as maturity from Canadian borrowers, who are “not blinded by low interest rates.”
Still, Canadians are “extremely sensitive” to interest-rate risk.
“We got a sense of it when […] the prime rate went up,” he said, demonstrated by the increase in delinquency rates and insolvencies.
Total insolvencies last year hit their highest level since the immediate aftermath of the global financial crisis and recession, a Scotiabank Economics report said.
Tal noted the change in insolvencies was in interest-sensitive vehicles, like secured and unsecured lines of credit. A CIBC report in December pointed to products where interest rates were reset with increases in prime tied to the Bank of Canada’s 2018 rate hikes.
Write-offs are up on unsecured lines of credit and home equity lines of credit, for example, but not on credit cards, whose rates aren’t influenced by monetary policy.
“You don’t see it in auto loans,” Tal said. “You don’t even see it in credit cards. Clearly, you don’t see it in mortgages.”
He added, “Luckily, the increase in interest rates did not last and, therefore, the damage to the delinquency channel is not very significant, and not impacting banks in a very significant way.”
Given the low interest-rate environment and the possibility the BoC will cut rates this year, “you will not see a significant acceleration in delinquencies any time soon,” Tal said.
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