RISK: Bank of Canada drops interest rate

Drops to 0.75 percent amid oil slump threat

The looming threat of sliding oil prices forced the Bank of Canada to drop its trend-setting interest rate Wednesday, a surprising move that shows just how much the country’s economic outlook has soured in a matter of months.

The central bank, which nudged its key rate down to 0.75 per cent from one per cent, said the rapid oil-price collapse has created many unknowns around economic growth in the oil-exporting nation.

Until the effects of oil’s late-2014 tailspin started to trickle through, Canada appeared to be on the cusp of a promising post-recession rebound _ and inching closer to a rate hike.

“The large decline in oil prices will weigh significantly on the Canadian economy,” the Bank of Canada said in its quarterly monetary policy report, which it also released Wednesday.

“Given the speed and magnitude of the oil-price decline, there is substantial uncertainty around the likely level for oil prices and their impact on the economic outlook for Canada.”

The loonie dropped 0.94 of a cent to 81.66 cents US —  its lowest level since late April 2009 in the wake of the announcement.

The decision marked the first time the overnight rate budged in either direction since September 2010.

The Bank of Canada was widely expected to once again stand pat on its rate Wednesday, with most economists projecting an increase in late 2015 or early 2016.

The central bank, however, predicts the impact of falling oil prices to overshadow encouraging signs of economic life spotted outside the weakening energy sector, such as rising foreign demand, a boost in exports and job growth.

“The oil-price shock is occurring against a backdrop of solid and more broadly based growth in Canada in recent quarters,” the bank said.

“While business investment had been showing some encouraging signs in the third quarter of 2014, the near-term outlook appears much-less positive.”

The bank also said the oil-price drop will have an adverse effect on income and wealth, which would reduce the growth of domestic demand. It also expected additional negatives on consumption and public finances.

The rate decrease aims to soften the blow of cheaper crude.

The Bank of Canada said lowering the rate was intended to “provide insurance” against risks posed by low oil to the country’s inflation and its financial stability.

It predicted Canada’s fortunes to also receive a boost from the ever-strengthening U.S. economy, an country expected to benefit from lower crude prices.

Copyright © 2017 Transcontinental Media G.P.
Transcontinental Media G.P.