© Reuters. A sign is pictured in front of the Bank of Canada building in Ottawa
By Kelsey Johnson and David Ljunggren
OTTAWA (Reuters) – The Bank of Canada announced on Wednesday that the outbreak of the corona virus should trigger Canada's largest short-term slump, but suspended its regular economic forecasts and pointed to exceptional uncertainty about the outlook.
The Canadian central bank was expected to keep interest rates constant at 0.25%, added provincial and corporate bonds to its quantitative easing program, and said it was "ready to adjust the size or duration of its programs if necessary".
"The Canadian economy is experiencing a significant and rapid decline," said Governor Stephen Poloz at a press conference. "In the near future, policymakers can do little more than cushion the blow."
In its quarterly monetary policy report, the bank outlined two scenarios under which real gross domestic product (GDP) would shrink. It was estimated that real GDP would decrease 1% to 3% in the first quarter and shrink by 15% to 30% in the second quarter, both compared to the fourth quarter of 2019.
Canada's economy contracted 9% in March compared to February, and is likely to decline 2.6% in the first quarter, Statistics Canada said in a Flash forecast released on Wednesday.
Headline inflation is expected to fall to around 0% in the second quarter of 2020, largely due to a sharp drop in gas prices.
The Canadian dollar fluctuated after the interest rate decision by 1.4060 per US dollar or 71.12 US cents. It hit a one-week low of 1.4120 early in the day. "It is still on the path of quantitative easing, as we and others have suggested, to be appropriate," said Doug Porter, chief economist at BMO Capital Markets, referring to the move to buy provincial and corporate bonds.
Porter said it was "remarkable … that a crack forecasting team like the Bank of Canada got a little into their hands, and suggested that given the uncertainty, they simply cannot make a realistic call to the economy." "
The bank cut its overnight money rate three times in a row by half a percentage point to 0.25% in March, which it calls the "floor" for interest rates, and launched its first quantitative easing program.
The outbreak had "significant and negative" effects on supply and demand overall in the short term – a reality that was exacerbated by the shock of the drop in oil prices.
"There is considerable uncertainty regarding the timing and development of the recovery," the bank said.
Officials across Canada have ordered the closure of non-essential companies and asked people to stay at home.
Reduced working hours and lower productivity, the bank said, "mean capacity in the Canadian economy is shrinking and may only gradually recover."
In its global economic outlook released on Tuesday, the International Monetary Fund (IMF) said it now expected Canadian GDP to shrink by 6.2% this year.
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