Pandemic may spur rate cuts: insiders
Mounting concerns over the spread of coronavirus outside China sent global markets into a panic Monday and some economists are warning the prospect of a pandemic could push the Bank of Canada and the U.S. Federal Reserve to consider cutting interest rates sooner rather than later.
“It is reasonable to assume that coronavirus is going to last longer given the infection rate is higher than SARS and is still climbing. That itself might convince the Bank of Canada and even the U.S. Fed to cut interest rates. I wouldn’t be surprised,” said Benjamin Tal, deputy chief economist at CIBC Capital Markets. “This is just the beginning of coronavirus, and there is a consensus starting to be generated that maybe, it will last longer than expected.”
Stock markets began the week in turmoil as a surge in the number of coronavirus cases was reported outside China — specifically in South Korea, Iran and Italy — just days after G20 officials warned that the ongoing outbreak would have a detrimental effect on global growth if not contained soon.
The Dow Jones Industrial Average plunged 1,031 points, or 3.56 per cent on Monday, while the S&P 500 fell by 3.3 per cent, the steepest drop since August. The tech-heavy Nasdaq was hit even harder, losing 3.71 per cent to close Monday at just over 9,200 points.
Canadian markets felt the pinch too, with the TSX dropping by 1.5 per cent or approximately 280 points, ending the trading day at 17,562 points. The VIX, a measure of stock market volatility, surged by 35 per cent. The price of gold, meanwhile, soared by 2.6 per cent, reaching a seven-year high while the 10-year Treasury yield plunged to its lowest level in almost four years as investors sought out traditional safe havens to weather the uncertainty. Oil prices tumbled by as much as four per cent on concerns over stalling global demand.
“The virus spread comes at a time when companies are already facing significant inventory restocking and a stalling in global manufacturing following the application of tariffs and overall trade tension,” said Frances Donald, chief economist at Manulife Investment Management.
“Coronavirus is adding salt to the wound.”
Donald believes the BOC will seriously contemplate a rate cut.