The Bank of Canada has slashed its key lending rate by 50 basis points from 1.75% fo 1.25% amid economic pressures brought on by the COVID-19 virus outbreak.

 

“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,” reads a statement issued by the central bank, backing its decision to cap a rate increase run that began in 2017.

 

 

The lending rate had previously faced upwards pressure from a low of 0.5% that spanned from mid-2015 to mid-2017, and over a period of six quarters more than tripled to 1.75% where it remained until now.

 

Although the market response to the drop is yet to be determined, some economists have warned that a negative adjustment alongside pre-existing market tremors could further depress the economy as global markets settle on COVID-19’s short and medium-term impacts.

 

Today’s rate drop was not a surprise, however. Analysts had expected 2020 to deliver a rate pull back by the bank as the overall strength of the country’s production and consumption activities weighed on the Canadian economy, which in recent months has found itself balancing the effects of several unforeseen pressure points like civil unrest and transport disruptions.

 

“It is becoming clear that the first quarter of 2020 will be weaker than the Bank had expected,” the bank stated. “The drop in Canada’s terms of trade, if sustained, will weigh on income growth. Meanwhile, business investment does not appear to be recovering as was expected following positive trade policy developments. In addition, rail line blockades, strikes by Ontario teachers, and winter storms in some regions are dampening economic activity in the first quarter.”

 

With a key rate drop the silver lining for consumers is likely to materialize as lower borrowing rates for products like mortgages and lines of credit. Individuals with variable mortgages are likely to see lower rates in the coming weeks, while those renewing could be rewarded with lower monthly carrying costs as lenders compete for business.

 

And today’s rate drop may not only be the largest single adjustment in over a decade with its 50 point move, it could also be the first of several more that may see the rate return to pre-2018 levels. C

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