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March 04, 2020

Central banks cut as coronavirus spreads

At its scheduled interest rate announcement on March 4, the Bank of Canada (BoC) cut its target for the overnight rate from 1.75% to 1.25%, citing a material negative shock to the Canadian and global outlooks from the COVID-19 virus.

Just over the past week, market participants moved from broadly expecting rates to remain unchanged to almost fully pricing in a 50 basis point cut heading into the meeting.

Market conditions have evolved quickly. Earlier in January, Chinese officials tied an outbreak of pneumonia in Wuhan, a port city of 11 million people, to the coronavirus virus (COVID-19.) Since then, it has spread to 80 countries, infecting 92,823 people and killing 3,164. As it spread, the market sold off in anticipation of a global economic slowdown. Those concerns seemed heightened when the U.S. Federal Reserve introduced an emergency 50-basis-point rate cut on March 3.  

The Organization for Economic Cooperation and Development predicted that global growth could fall from 3% to just 1.5% in 2020. U.S. economic growth has also been revised downward to just 1.2%. For its part, the BoC said Canada’S economy, which had been slowing in recent quarters, to just 0.3% in Q4 2019, could see weaker growth than expected.

Other central banks, including Japan’s and the European Central Bank (ECB), are expected to follow suit. However, the ECB and Bank of Japan have spent the last decade trying to lift inflation and growth – all but exhausting their monetary policy options.

The rare move from the Fed to introduce an emergency rate cut, clearly underscored the evolving risks that the coronavirus poses to the U.S. and global economy. As well, the Fed’s move provided greater flexibility for other central banks to cut.

While interest rates may not directly address growth concerns, they may help assure market participants and instill confidence that financial conditions will remain accommodative. The depth of the potential economic fall off, can be seen in the performance of the Chinese economy, the world’s second largest, accounting for one-fifth of global GDP. Indeed, coal consumption, passenger volumes, and property transactions, were on average down 70-80% from their 2019 levels. But at the end of February had only rebounded to about 60% below 2019 levels.

The knock-on effect from the slowing growth in China and the expanding epidemic, could, according to the OECD, push Japan and Europe into recession by year-end. Predictions for the U.S. were nearly as bad, with many analysts expecting zero or negative growth in the second quarter, with some forecasting a recession before year’s end.

The Fed, however, does not appear to be that pessimistic, saying U.S. economic fundamentals remain strong. Indeed, private payrolls rose by 183,000 positions in February, beating expectations for 170,000. While recognizing the weaker outlook, both the Fed and the Bank of Canada affirmed their readiness to respond with additional policy measures to support respective policy goals, pointing to ongoing coordination across G7 central banks and fiscal authorities.


This commentary contains information in summary form for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this commentary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life Global Investments (Canada) Inc. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this commentary.

©Sun Life Global Investments (Canada) Inc., 2020. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.

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