How the coronavirus is affecting your mortgage rates

The Bank of Canada doesn’t always follow the U.S. Federal Reserve, but it did this week.

Canada’s central bank slashed its policy rate by a half-point on March 4, matching the Fed’s surprise announcement 24 hours earlier.

The twin announcements — along with various others in recent days — raised COVID-19 contagion to the status of economic crisis. The last time the U.S. made an unscheduled interest-rate announcement was during the Great Recession. The Bank of Canada stuck to its calendar, but went for shock value by going bigger than a typical quarter-point change. It hadn’t done anything like that since 2009, when it was on its way to dropping interest rates to effectively zero.

“Before the outbreak, the global economy was showing signs of stabilizing,” the Bank of Canada said in a statement. “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.”

There are lots of questions about whether pushing already low interest rates even lower will do much to counter the negative economic forces associated with the spread of the coronavirus. However, most agree that central banks can at the very least calm financial markets, and they seemed to have achieved that. North American equity markets were higher, credit conditions loosened and oil prices stopped falling.

“It helps provide confidence,” Wesley Blight, a portfolio manager at MD Financial Management Inc., adding that lower interest rates will also make it cheaper for governments to finance fiscal stimulus and hasten a recovery when the threat posed by COVID-19 passes.

In 2015, Governor Stephen Poloz and his deputies on the Governing Council cut interest rates in response to a massive drop in oil prices, which they knew from experience would severely depress economic growth by erasing wealth earned from energy exports. The coronavirus represents a similar threat, and possibly a more serious one.

Today, world oil prices are already more than US$10 per barrel lower than the Bank of Canada had forecast in January, as traders anticipate weaker demand from a global economy on the verge of at least a mild recession. Supply chains are being disrupted and tourism will suffer as long as quarantines and travel advisories remain in place. Financial markets remain on edge, a present danger that could wreck consumer and business confidence at any moment.

“The outlook is clearly weaker now than it was in January,” the Bank of Canada said. “As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.” The central bank said markets were functioning well, and that it would “ensure that the Canadian financial system has sufficient liquidity.

”But if not for the Fed, the Bank of Canada might have opted for a smaller quarter-point cut. All things equal, lower interest rates will stoke demand for mortgages and policy-makers already worry that Canadian households are carrying too much debt. Poloz and his deputies noted that consumption was stronger than expected in the first quarter, easing concerns that an important engine of economic growth might have been sputtering.

Yet, external conditions trumped all other considerations. A gap between U.S. and Canadian benchmark rates could have put upward pressure on Canada’s currency, or simply introduced more volatility in the exchange rate. Either would only add to the current trials of exporters.

“The Bank of Canada felt compelled to avoid letting the interest-rate differential with the Fed get any wider than it already is,” said Darcy Briggs, who oversees a bond portfolio at Franklin Bissett Investment Management in Calgary. “If it hadn’t moved, there would have been a lot of people scratching their heads.”

Briggs and some others think the Bank of Canada would have had to cut rates even if COVID-19 had remained in China. The Canadian economy stalled in the fourth quarter, and is now growing at a pace that poses no risk to inflation. For some, that means policy-makers should push the accelerator to get the economy back to its speed limit. Poloz and his deputies have resisted doing that, because they doubt the gains would justify the long-term risk of re-starting a credit binge.

To be sure, the central bank offered a downbeat assessment of the economy’s state before COVID-19 became a driving force.

Policy-makers have been waiting on a significant increase in business investment for years. The trade wars depressed animal spirits, as profitable companies retreated to the sidelines to wait for the horizon to clear. The Bank of Canada assumed the new North American trade agreement and a truce between the U.S. and China would spur investment. It acknowledged in the policy statement that it is still waiting for that to happen, offering another reason to assume the near-term outlook will be weaker than expected.

“Business investment does not appear to be recovering as was expected following positive trade policy developments,” the central bank said. “In addition, rail line blockades, strikes by Ontario teachers, and winter storms in some regions are dampening economic activity in the first quarter.”

Those latter headwinds are temporary and wouldn’t call for additional stimulus. COVID-19 also should be temporary, although no one knows how temporary at this point. That’s why today’s Bank of Canada cut could be followed by more. The bank’s next scheduled policy announcement is mid-April. Both Blight and Briggs said another cut is likely. They have taken defensive positions in their portfolios and don’t intend to take on risk until the future becomes clearer.

“We’re in a period of sustained volatility,” Briggs said.