Virus fears pull down interest rate expectations

While the further spread of the Covid-19 virus increases the chance of interest rate cuts, the Bank of Canada seems likely to approach the issue in the same way that it approached the US-China trade war. The Bank hinted several times last year that it was ready to act in response to the trade war threat but, due to the risk that looser policy could pour further fuel on the surging housing market, was not prepared to cut interest rates unless it saw weakness in the data. Overnight index swaps are now pricing in 50 bp of cuts by the middle of 2021, compared to 30 bp this time a month ago. But as the number of Covid-19 cases in North America is still limited and Canada has only loose ties with the most affected countries so far, we suspect the Bank will wait on the side lines to see how the situation develops.