ODDS OF A COORDINATED RATE CUT ARE RISING
Bank of Canada governor Stephen Poloz has a reputation for being dismissive of financial markets. But it’s not quite true. “My motto is you always ignore what the market is telling you at your peril,” he said in Australia last month, before adding, “but they are prone to exaggeration.”
By Tuesday evening Poloz and his five deputies will have to decide to what extent financial markets are exaggerating the economic threat posed by COVID-19. They could push a decision to the limit and wait until the early hours of March 4, when the Bank of Canada is scheduled to update its policy stance at 10 a.m. ET. Typically, the policy statement is finalized the night before to leave time for translation and formatting.
It’s also conceivable that the Bank of Canada’s translators have been told to be on call 24/7 for the next few days. Events are moving fast and their services could be required far sooner than expected. In an echo of the financial crisis more than a decade ago, central banks appear to be working together to arrest panic selling, setting the stage for a coordinated round of stimulus.
Jerome Powell, chair of the U.S. Federal Reserve, stopped the free fall on Wall Street Friday afternoon with a statement that said the Fed would “act as appropriate to support the economy.” Powell’s counterpart at the Bank of Japan, Haruhiko Kuroda, similarly promised on Monday to “strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”
The Bank of England said it is working “to ensure all necessary steps are taken to protect financial and monetary stability,” and the finance ministers and central bank governors of the Group of Seven — the United States, Japan, Germany, France, the United Kingdom, Italy and Canada — said they will hold a conference call on Tuesday. All those announcements appeared to ease some anxiety. Stock prices surged and global oil prices rallied.
Policy-makers could opt to let their words do the work for now and wait for more information about how the spread of the coronavirus is affecting the economy.
All things equal, that probably would be the Bank of Canada’s preferred course. Poloz has made “data dependent” his mantra, and he and his deputies don’t have many solid Canadian indicators with which to work. Officials will have more timely information, but as of the week ended Feb. 19, the Bank of Canada’s commodity-price index had fallen about eight per cent since the start of the year, compared to the plunge of about 20 per cent over the six weeks that preceded its surprise interest-rate cut in January 2015. Things are bad, but they might not yet represent an emergency in Canada.
“We expect that the BOC in March can signal cuts are a very likely next step given the deteriorating global growth outlook,” Veronica Clark, an economist at Citibank, told her clients on Monday. “However, for a consistently data-dependent central bank, lowering rates would make more sense when it updates its forecasts in April.”
The picture should come together relatively quickly. The financial crisis was magnified by opacity. Credit markets froze because no one knew who was solvent and who was on the verge of bankruptcy. The economic effects of COVID-19 are at least out in the open, whether it be cancelled flights, empty factories or closed schools that force parents to leave work. Such things can be counted, or at least extrapolated.
Still, if confidence is so fragile that markets crashed at the sight of the coronavirus showing up in
Europe, then the central banks will probably have to back their words with action. There is general agreement that global problems require a global response, so if central banks decide they need to do something, they should do it together. The sight of policy-makers linking arms outside their scheduled policy dates would also send a powerful message.
The last time the Bank of Canada did anything like that was on Oct. 8, 2008, when the G7 central banks, along with Sweden’s Riksbank and the Swiss National Bank, orchestrated a co-ordinated round of interest-rate cuts that saw the Canadian central bank drop its benchmark by half a point to 2.5 per cent. It lowered rates by an additional quarter point at its scheduled rate announcement two weeks later, and would eventually drop the policy rate to nearly zero in April 2009.
No one is predicting a repeat of the Great Recession, but a mild recession is starting to look like a real possibility. The Organisation for Economic Co-operation and Development cut its global economic growth outlook for 2020 to 2.4 per cent, a pace that economists associate with a recession at the international level. “The world economy is in its most precarious position since the global financial crisis,” Laurence Boone, the OECD’S chief economist, said in a blog post.
The Bank of Canada won’t update its forecasts until April, but it could be moved by such a dramatic repositioning by a forecaster with the resources of the OECD, a Paris-based think-tank whose members include a few dozen of the richest countries. In January, the last time the Canadian central bank updated its outlook, it foresaw growth of 3.1 per cent this year, a slight uptick from 2.9 per cent in 2019.
“I’d be comfortable with a cut if only because of what has happened to asset prices,” Bill Robson, president of the C.D. Howe Institute and a long-time observer of Canadian monetary policy, said in an interview. “People’s expectations about the future have been marked down quite a bit.”
Central banks appear to be working together to arrest panic selling, setting the stage for a coordinated round of stimulus.