Bank of Canada cuts key interest rate by half a percent to counter impact of coronavirus

The Bank of Canada announced a cut in its trend-setting interest rate by a half-percentage point on Wednesday. It dropped the rate from 1.75 percent to 1.25 percent in an attempt to soften the impact that COVID-19 has had on the economy.

The decision was made after a similar cut was implemented by the U.S. Federal Reserve on Tuesday, according to Global News.

In a statement, the bank said, “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.”

The decision was anticipated by traders and analysts though the impact of the move on markets, investors and consumers are still unknown.

Some analysts believe that the cut may scare investors even more after a stock market rebound was not instantly seen.

Economists are also wondering whether providing lower borrowing costs is the proper way to counter the impact that the coronavirus has had.

On Monday, TD economist Beata Caranci made a report saying, “Monetary policy is generally not highly effective in resolving supply-side shocks.” She added that fiscal policy is more effective “when targeted at the source of the supply shock.”

The bank noted that they made the decision because business activity has been slowed by coronavirus in certain areas due to the disruption of supply chains. The circumstances have resulted in a drop in the Canadian dollar as well as commodity prices.

“Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative,” the bank noted. “It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.”