By Kelsey Johnson and David Ljunggren
OTTAWA (Reuters) – The Bank of Canada on Wednesday said the coronavirus outbreak was set to trigger the biggest ever near-term Canadian slump but suspended its regular economic forecasts, citing exceptional uncertainty over the outlook.
Canada’s central bank held interest rates steady at 0.25% as expected, added provincial and corporate bonds to its quantitative easing program, and said it “stands ready to adjust the scale or duration of its programs if necessary”.
“The Canadian economy is experiencing a significant and rapid contraction,” Governor Stephen Poloz said in a news conference. “In the very near term, policy-makers can do little more than cushion the blow.”
In its quarterly monetary policy report, the bank outlined two scenarios under which real gross domestic product (GDP) would shrink. It estimated real GDP would fall by 1% to 3% in the first quarter and would contract by 15% to 30% in the second quarter, both compared with the fourth quarter of 2019.
Canada’s economy shrunk a record 9% in March from February, and probably declined 2.6% in the first quarter, Statistics Canada said in a flash forecast also released on Wednesday.
The overall inflation rate is expected to dive to around 0% in the second quarter of 2020, largely due to a sharp drop in gas prices, the central bank said.
The Canadian dollar
Porter said it was “notable… that a crack forecasting team like the Bank of Canada has sort of thrown up their hands a little bit, and suggested they just can’t make a realistic call on the economy given the degree of uncertainty.”
The bank slashed its overnight interest rate by half a percentage point three separate times in March to 0.25%, which it calls the “lower bound” for rates, and launched its first-ever quantitative easing program.
The outbreak is having “significant and negative” effects on total supply and demand in the near term – a reality, it added, that has been amplified by the oil price drop shock.
“Considerable uncertainty surrounds the timing and evolution of the recovery,” the bank said.
Officials across Canada have ordered non-essential businesses closed and have urged people to stay home.
Reduced hours and lower productivity, the bank said, means “capacity in the Canadian economy will decline sharply and may recover only gradually.”
In its World Economic Outlook released on Tuesday, the International Monetary Fund (IMF) said it now expects Canada’s GDP to contract 6.2% this year.
(Reporting by Kelsey Johnson and David Ljunggren in Ottawa; Additional reporting by Dale Smith in Ottawa, Allison Martell, Fergal Smith, and Nichola Saminather in Toronto; writing by Steve Scherer; Editing by Jonathan Oatis)
