Bank of Canada slashes rates again to provide 'bridge across the trouble'

OTTAWA (Reuters) - The Bank of Canada slashed its key interest rate for the second time in nine days on Friday to provide a “bridge across the trouble” as authorities seek to stave off a potential recession amid the coronavirus outbreak.

A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie

At the same time, Ottawa pledged C$10 billion ($7.2 billion) in credit support for businesses and pledged to do whatever was necessary to protect Canadians.

The central bank unexpectedly cut its overnight interest rate by 50 basis points to 0.75% after taking the same step on March 4. It was the first unscheduled cut since the financial crisis of 2008.

Bank of Canada Governor Stephen Poloz made the announcement at an unprecedented joint press conference with federal Finance Minister Bill Morneau, who vowed to unveil a substantial stimulus package next week.

The bank had said on Thursday it would add liquidity to the markets. Poloz told reporters he was particularly concerned by the potential damage to the economy from both the coronavirus and the low price for oil, a key Canadian export.

“We believe all this will be temporary but can be prolonged if confidence is unduly damaged. And so these actions are meant to buttress that confidence and give us a bridge across the trouble,” he said, repeating the bank was ready to cut rates again if needed.

Friday’s move brings Canada’s benchmark rate to its lowest since September 2017.

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Last week Poloz said the resilience of the economy could be “seriously tested” by the outbreak.

“This is certainly welcome and timely given how dramatically events have deteriorated this week,” said Sal Guatieri, senior economist at BMO Capital Markets.

The Canadian dollar CAD=D4 turned higher, reaching 1.3829 to the U.S. dollar, after initially weakening on the cut. The benchmark share index .GSPTSE was trading up 9.6% by late afternoon, after slumping by the most on record on Thursday.

Several economists in recent days have forecast the Canadian economy to slip into a recession in the absence of a big government stimulus.

“These are extraordinary times and that means we are ready to take extraordinary measures,” said Morneau.

“We are going to do whatever it takes to protect Canadians and keep our economy strong.”

In addition, Canada’s banking regulator cut the amount of capital lenders must hold to guard against risks, a move it said should add C$300 billion in lending capacity by the major banks.

Reporting by Kelsey Johnson and David Ljunggren, writing by Steve Scherer; Editing by Cynthia Osterman, Tom Brown and Marguerita Choy