In a move that virtually no economists were anticipating, the Bank of Canada announced this morning that it would be cutting the key overnight lending rate by 0.25 per cent – to a rate of 0.75 per cent.
The move is a response to falling oil prices that have severely weakened Alberta’s oil sands industry, which could lead to budget shortfalls of as much as $7-billion for the Alberta provincial government in 2016.
“Business investment in the energy-producing sector will decline. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth,” reads a statement by the Bank of Canada.
“The oil price shock increases both downside risks to the inflation profile and financial stability risks. The Bank’s policy action is intended to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projection horizon.”
Since the summer of 2014, global oil prices have fallen from about US$100 per barrel to below US$50 per barrel.
The Bank expects real GDP growth will be slower at about 1.5 per cent during the first two quarters of 2015. However, economic growth is expected to pick up during the last two quarters of the year, with an overall real GDP growth average 2.1 per cent for all of 2015.
“The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response,” the statement continues. “The economy is expected to return to full capacity around the end of 2016, a little later than was expected in October.”
Energy stocks soared today, with the S&P/TSX composite index up 291.03 points – a 2.03 per cent increase to 14,598.60 as of 9:38 a.m. PST. However, the Canadian loonie is currently at 80.75 cents US, a drop of 1.85 from closing time on Tuesday in reaction to today’s Bank of Canada announcement.
The key interest rate has been maintained at one per cent since the fall of 2010 and the next scheduled date for announcing the overnight rate target is March 4.
Feature Image: Canadian currency via Shutterstock