Central bankers are waking up to dramatically overhauled expectations about interest rates, as the coronavirus that started in China and is now creeping around the world rewrites their plans as quickly as the virus spreads.
Central bankers are waking up to dramatically overhauled expectations about interest rates, as the coronavirus that started in China and is now creeping around the world rewrites their plans as quickly as the virus spreads.
Investors are betting that there’s better than a two in three chance of a rate cut from the Bank of Canada as soon as next Wednesday, when Canada’s central bank is poised to reveal its next decision on interest rates. Not everyone believes it’s a sure thing, but the probability goes up as the illness spreads.
At the start of the year, the odds of Canada cutting its rate at the March meeting were barely one in 20. Even a week ago, the odds of a cut were barely one in six. But that was before the virus that causes COVID-19 started its spread around the world, infecting markets everywhere with something almost as dangerous as the pathogen itself: fear.
Both Canadian and U.S. stock markets are in correction territory, meaning declines of more than 10 per cent. Supply chains at technology companies like Apple have been disrupted as Chinese factories shut down, making it impossible for manufacturers to get finished products to market.
Airlines have seen their ticket sales plunge as consumers decide to stay home. Businesses around the world are cancelling conferences and other events that require people to meet face to face. And if coronavirus becomes widespread here, many businesses will struggle with shortages of workers and supplies.
All things being equal, central banks raise interest rates when they want to cool down overheated economies. They cut when they want to stimulate an economy that needs a little warming up.
Faced with the potential of a sickly economy because of coronavirus, central banks around the world are expected to try to flood the system with cheap money in the hope that it’s the shot in the arm the economy needs to get better.
China, Brazil, Russia, the EU, Indonesia, India and Mexico have all cut in recen