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Bank of Canada's Surprise Rate Cut

Posted by Joseph Trevisani on Jan 21, 2015 1:38:00 PM

The Bank of Canada cuts its overnight lending rate today, shocking the markets and sending the Canadian Dollar reeling, as the government tries to counter the effect of cheaper oil on economic growth and inflation. 

In the first rate adjustment in more than four years the central bank dropped its benchmark rate 25 basis points to 0.75 percent ending its longest period of stable rates since 1950. The bank also cuts its forecast for economic growth and inflation citing the dramatic collapse in crude prices. 

"The considerably lower profile for oil prices will be unambiguously negative for the Canadian economy in 2015 and subsequent years," noted the central bank in its quarterly Monetary Policy Report.

The Canadian Dollar promptly fell 2.5 percent against its U.S. counterpart, slipping from 1.2078 to as low as 1.2394 before recovering slightly, with the bulk of the move coming in the first 15 minutes after the announcement. The Toronto Stock Exchange soared on the news climbing almost 2 percent, 273 points to 14582 at 1:30 pm in New York.

None of the twenty-two economist in the Bloomberg survey had predicted a rate cut and the market consensus had been for a rate hike in the fourth quarter of this year or in early 2016. 

The bank lowered its economic growth forecast for the first half of 2015 to 1.5 percent from the 2.4 percent it had predicted in October and cut its estimate of the entire year to 2.1 percent from 2.4 percent. Inflation will be below the bank's 1 to 3 percent target for most of 2015 and could be as low as 0.3 percent in the second quarter.  

“The oil price shock increases both downside risks to the inflation profile and financial stability risks,” the Bank of Canada said in the accompanying statement. The lower rate is “intended to provide insurance against these risks” and faceplate the adjustments needed to return the economy to full output, it said.

The economy is not expected to reach full capacity until the end of 2016. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

boc jan 21

 cad jan 21

 

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