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Bank of Canada says coronavirus could pose serious test to economy

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By Fergal Smith

TORONTO, March 5 (Reuters) - The Canadian economy's resilience could be "seriously tested" by a coronavirus outbreak, depending on its severity and duration, Bank of Canada Governor Stephen Poloz said on Thursday.

Poloz spoke a day after the central bank slashed a key interest rate by half a percentage point and said it was prepared to cut further if needed to help tackle the effects of the coronavirus, also known as COVID-19.

"The Canadian economy has demonstrated good resilience in the past couple of years. That resilience could be seriously tested by COVID-19, however, depending on the severity and duration of its effects," he told a Toronto business audience.

The Canadian dollar fell to C$1.3421, or 74.51 U.S. cents, after the governor's remarks.

The economy was headed for another quarter of "very slow economic growth" which could drag on into the second quarter, Poloz said. As well as the outbreak, the economy is dealing with the effects of bad weather, rail blockades and a teachers' strike in Ontario.

"There is a real risk that business and consumer confidence will erode further, creating a more persistent slowdown, especially given recent declines in stock markets," he said.

The central bank cut rates by 50 basis points to 1.25% on Wednesday. Ahead of the speech, money markets saw about a 70% chance of another cut in April.

Commodity prices have dropped by more than 10% and crude prices by close to 20% since the outbreak began. The resulting shock will prolong the recovery in Canada's already stressed oil-rich west, he said.

"These stresses will inevitably find their way from commodity-producing regions into other parts of the country as those who are affected directly spend less money on everything," he said.

Some commentators fretted that low rates could fuel already active housing markets. Poloz, though, said declining consumer confidence would likely reduce activity.

"In this context, lower interest rates will actually help to stabilize the housing market rather than contribute to froth," he said. (Reporting by Fergal Smith in Toronto, writing by Kelsey Johnson and David Ljunggren in Ottawa; Editing by Nick Zieminski)

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