Today’s half-point cut in the Bank of Canada rate – to 1.25 per cent from 1.75 per cent – was a surprising and “aggressive” decision, a Western expert in monetary policy said Wednesday.
And even though one intent of the change is to inoculate the Canadian economy from the global effects of the coronavirus, it’s unclear whether that will even work, said Economics professor Stephen Williamson.
The rate cut was the first drop since 2015 and came a day after the U.S. Federal Reserve announced an identical decision.
“Normal policy, for some reason, is up a quarter-point, down a quarter-point or stay the same. So, half a point is an aggressive move,” said Williamson, who serves as the Jarislowsky Chair in Central Banking and Bank of Canada Fellow.
In its statement, the Bank of Canada said coronavirus represented a “material negative shock to the Canadian and global outlooks.” It also attributed the drop to lower-than-expected Gross Domestic Product in late 2019 and the expected impact this quarter of rail blockades, teacher strikes and winter storms.
“It’s like they had to look for reasons, otherwise you could argue things look OK – the Bank is achieving its inflation target; the raw consumer price index is above target; the labour market is still good; unemployment is still low; and employment growth is fairly strong.
“They’re taking pains towards bending things to justify their decision,” when coronavirus (COVID-1) seems to be the core reason for the change.
A rate drop is usually intended to kickstart a slow economy. A shift based on the projected impact of a health outbreak isn’t something Williamson has seen before.
“Now we’re in uncharted territory,” he said.
Globally, other central banks have lowered their rates as coronavirus worries hit the financial markets.
Canadian monetary policy has an enviable history of being boring and largely predictable – and that’s a good thing, Williamson noted. But this is different.
“This seems to be, ‘Well, there’s a lot of uncertainty about what exactly going to happen, but we think it could be bad, and when bad things happen, we lower interest rates.’ And that’s about it, I think. It’s not like there’s a real tight economic argument to make that lowering interest rates is going to help us in this circumstance. Most likely it’s not going to matter very much.
“There’s so much we don’t know including how a central bank should react when the coronavirus hits. “