Investors bet on Bank of Canada rate cut this week as virus spooks markets

Investors are betting Canada's central bank will ease interest rates for the first time in almost five years on Wednesday as the coronavirus spreads, which would make it the first G7 country to cut since the epidemic started.

Bank of Canada Governor Stephen Poloz, who is stepping down at the end of a seven-year mandate in June, last cut rates in July 2015. In January, he opened the door to reducing the 1.75% benchmark interest rate, currently the highest in the G7.

Major central banks, including the U.S. Federal Reserve, have since Friday reassured markets they will protect their economies from the impact of the virus, fueling speculation of co-ordinated rate cuts.

"The market is clearly, clearly screaming for something from the central banks," said Phil Mesman, head of fixed income at Picton Mahoney.

The Bank of Canada observes a no-comment period in the days before an interest rate decision. But money markets have shifted rapidly since Thursday, when the sell-off on Wall Street accelerated, from seeing little chance of a rate cut this week to pricing one in and expecting further easing in April.

"We already had domestic reasons for easing long before the virus hit, and now the virus just tips that over the edge," said Derek Holt, vice president of capital markets economics at Scotiabank.

Holt has not ruled out the central bank opting for a cut of 50 basis points rather than the more common 25 basis points.

Canada runs a current account deficit and is a major exporter of commodities, including oil, so a slowdown in the global flow of trade or capital could hurt. Oil prices have fallen about 30% from their January peak.

The concern for the Bank of Canada "is that between the direct effects of coronavirus on travel restrictions and consumer caution, there's this added concern that this downturn in the markets could weaken confidence more broadly," said Doug Porter, chief economist at BMO Capital Markets.

Canada's economic growth slowed to an annualized rate of 0.3% in the fourth quarter, the worst performance in almost four years, data showed last week, while railroad line blockades in recent weeks could weigh on the current quarter.

"The Canadian economy was barely growing in the last quarter of 2019, so we're putting a shock into the global economy at a time when Canada desperately was looking for momentum," said Avery Shenfeld, chief economist at CIBC Capital Markets.

By Fergal Smith