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Canadian interest rate cuts expected in March and April: Oxford

Market experts had been widely anticipating Canada’s central bank to cut its mortgage-market influencing overnight rate at some point in the first half of 2020.

Now, with mounting fears over an uncontainable coronavirus outbreak rattling Canada’s economy and sending global markets spiraling, economists from Oxford Economics believe the Bank of Canada will move swiftly to cut its overnight rate twice in the next two months.

“We expect the Bank of Canada will reduce its policy rate a quarter point at next week’s meeting and again in April. We had already been anticipating lower rates, but think they are even more likely now as mounting “transitory” headwinds, led by the COVID-19 outbreak, hit an already vulnerable economy,” wrote Oxford Economics’ Tony Stillo and Michael Davenport in a research briefing published today.

Stillo and Davenport noted that Canada’s economic performance had slowed to a crawl by the end of 2019, before any concerns over the coronavirus outbreak materialized. The substantial increase in economic uncertainty since then is likely the catalyst the central bank is looking for in the direction of taking action now, rather than waiting until the spring or beyond.

While the economists acknowledged that there are legitimate concerns over a rate cut overheating Canada’s housing market and encouraging household debt growth, the pros vastly outweigh the cons in the current climate of global economic panic.

Stillo and Davenport described a Bank of Canada rate cut as “insurance against [a] sharper slowdown if the coronavirus outbreak escalates to [a] global pandemic.”

Not all economists are as convinced that a rate cut is a certainty next week. Capital Economics’ Stephen Brown noted that with cases in Canada totaling only 14 (as of the time of writing on February 28th), the Bank of Canada may hold off until later in the year, fearing a rate cut now could heat up the housing market to a dangerous point.

“We think the Bank would only cut if it were convinced that the disruption caused by the virus elsewhere in the world has already been enough to seriously jeopardise domestic growth,” he wrote in a note published Friday.

In the bank’s weekly market news digest, TD economist Ksenia Bushmeneva wrote that the probability of a rate cut has increased substantially over the last couple weeks, but it remains unlikely as the Bank of Canada exercises caution and waits to develop and clearer understanding of how severe the economic disruption caused by the coronavirus will be.

“Instead, given the list of risks facing the Canadian economy, we expect [Bank of Canada] Governor Poloz to use this opportunity to open the door even wider to monetary easing later this Spring,” she wrote.

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