Canada Shock And Awe: BOC Unexpectedly Cuts By 50bps, Most Since Crisis; “Ready To Adjust Further”

With Wall Street consensus expecting nothing from the Bank of Canada today, and even money markets were at beast hoping for a modest easing, moments ago the Bank of Canada “pulled a Fed” when it shocked traders after cutting rates by an unexpected 50bps, from 1.75% to 1.25% (with expectations for an unchanged print), citing the COVID-19 virus as “a material negative shock to the Canadian and global outlooks,” and as a result “monetary and fiscal authorities are responding.”

The 50bps rate cut was the biggest since the financial crisis.

If that wasn’t enough of an easing shock, in an even more foreceful dovish surprise, the bank said that “in light of all these developments, the outlook is clearly weaker now than it was in January. As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target. While markets continue to function well, the Bank will continue to ensure that the Canadian financial system has sufficient liquidity.

Some more highlights from the statement:

• While Canada’s economy has been operating close to potential with inflation at target, the virus is a material negative shock to the Canadian and global outlooks
• Before the outbreak, the global economy was showing signs of stabilizing. However, COVID-19 represents a significant health threat to people in a growing number of countries
• Business activity in some regions has fallen sharply and supply chains have been disrupted, reflective in CAD and commodities
• It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity
• Consumption was stronger than expected, supported by healthy labour income growth
• Residential investment continued to grow, albeit at a more moderate pace than earlier; meanwhile, both business investment and exports weakened
• Rail line blockades, strikes by Ontario teachers, and winter storms are dampening economic activity in the Q1.
• In light of all these developments, the outlook is clearly weaker now than it was in January
• Bank will continue to ensure that the Canadian financial system has sufficient liquidity

While USDCAD sold off very modestly into the announcement to around 1.3330, it then spiked higher on the 50bp cut to 1.3415.

And with the central bank now clearly in dovish mode, the OIS is pricing in over 50% chance of an additional 25bps cut in April as the entire world sinks into a Japanese trap.