Bank of Canada leaves overnight interest rate at 0.75 per cent

The Bank of Canada announced that it will be maintaining the overnight interest rate at a low 0.75. The bank rate will be one per cent and the rate on deposits 0.50 per cent.

+ Add Image	1 of 2

Total Consumer Price Index(CPI), according to the Bank, rose just one percent even though core inflation has remained near 2 percent for the last few months. The lower CPI rate is the result of the sharp drop in energy prices. The drop in the value of the dollar, increasing the cost of U.S. imports, has offset other factors that might reduce prices.

During the first quarter of this year, the Canadian economy has stopped growing due to damage caused by the decline in oil prices and its negative effect on the oil production sector.The Bank statement said:“The impact of the oil price shock on growth will be more front-loaded than predicted in January, but not larger. The ultimate size of this impact will need to be monitored closely.” The Bank predicts that the remaining quarters will see a rebound due to low interest rates, and the positive effect that lower dollar will have on exports. While the lower dollar helps exporters in that their products may be cheaper in countries such as the US, the higher prices for imported machines and materials used in production may partially offset these gains in some cases. The Bank has decided not to lower interest rates further as it did in January this year.

Stephen Poloz, the Bank of Canada Governor said: "By the middle of the year we should be seeing only the good stuff." However the statement also contained a number of warnings about the road ahead including the slow pace of business investment, and falling prices for Canadian commodity exports including oil, natural gas, lumber, hogs and iron ore.

For the entire year, the Bank predicts a growth rate of 1.9 per cent, down from the forecast of 2.1 per cent predicted in January. After no growth this quarter, the growth rate will be 1.8 per cent, 2.8 per cent and 2.5 per cent over the following three quarters on an annualized basis. Given the relatively slow growth rate, many economists expect that the Bank could very well cut rates again before raising them next year. Economist, David Madani, of Capital Economics insisted that it was "pure fantasy" if the Bank believes that economy will rebound as quickly as it predicts unless there is even more interest rate relief. However, the Bank sees the current rates as appropriate at least for now. If growth remains relatively sluggish Poloz may decide to lower rates once again as some predict. The Canadian dollar reacted positively to the Poloz announcement, increasing in value relative to the US dollar.

Loonie takes a dive after Bank of Canada cuts interest rate

After Canada's central bank, the Bank of Canada, cut the bank rate from 1.0 percent to .75 percent, the Canadian dollar, the loonie, fell to its lowest level against the US dollar since 2011.

This morning, January 23, the loonie was still trading below 81 cents to the US dollar. The Bank of Canada rate cut caught markets by surprise as no economists had been predicting the drop at this time, although many were beginning to see a drop later in the year if economic growth remained sluggish. A statement from the bank said: “This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada, 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 projected horizon." The rate drop was made as both the bank and the IMF predicted lower growth in Canada in 2015. The sudden drop was no doubt part of the reason the loonie's value declined so quickly.

Many of Canada's exporting companies will benefit from the lowered value of the dollar. American companies buying from Canadian companies will find that their dollar buys more as the US dollar strengthens and the Canadian dollar is worth less. The lower loonie is a mixed blessing though as Canadian consumers will have to pay more for imported U.S. goods. The move to quantitative easing in the EU also drove down the value of the Euro. It would seem that there may be moves in many countries to cut the value of their currencies so as to improve their export positions.

 The U.S. dollar at the same time is remaining quite strong. This will be a great boon for U.S. consumers as imports will be cheap. U.S. exporters may find that there is less demand for some of their goods as they will be higher in price than those of foreign competitors. Sebastien Galy of Societe Generale said: "The Bank of Canada has taken the bull by the horn deciding to target a weaker CAD. It is a surprise so early but indicates the emphasis on adjusting the CAD for a very sharp reversal in its terms of trade gains since 2002 (oil)." While Greg Moore, of RBC Dominion Securities, did not think that the bank head, Stephen Poloz, deliberately attempted to weaken the loonie further, he admitted that Poloz did see a lower currency as an important part of the recovery. Galy expects that the loonie will reach 80 cents and perhaps even 78 cents.

Lower currency prices are not necessarily a boon for a country. The fall in value of the ruble is a disaster for Russia. While it makes exports cheaper, as the price of a main export oil tumbles and it faces economic sanctions, economic growth slows and costs of imports soar. Countries such as China reap an economic windfall as the prices of its gas and oil imports from Russia drop. The U.S. does not complain about the precipitous drop in the value of the Russian ruble. On the other hand, the US constantly complains that China continues to keep the value of its currency low to make its exports more competitive. Even last April, the US was still making noises about Chinese currency manipulation: However, the Treasury expressed concern about recent reports of Beijing's "heavy intervention" to keep the value of the currency low to gain trade advantages. A weaker yuan makes Chinese goods cheaper for Americans and makes U.S. goods more expensive for Chinese, giving an advantage to Chinese exporters. So far, there have been no complaints about the Canadian move. In the case of Canada the lower dollar will make the raw materials that are among the prime exports of Canada to the US cheaper so the move helps the U.S., but imports from China are mainly manufactured goods I would expect.

 Other exporting countries such as Australia may decide to follow the Canadian example to lower the value of their currencies to remain competitive globally and increase exports. Shares of exporters, such as West Fraser Timber Co. climbed after the rate cut and the fall of the loonie. The TSX index rose 1.8 percent after the cut as well. Some exporters price their goods in US dollars. David Garofalo, CEO of HudBay Minerals Inc. said: “For companies like ourselves that have operating costs denominated in Canadian dollars and revenues in U.S. dollars, it is a win.” For U.S. retailers close to the Canadian border who benefit from increased Canadian shopping the fall in the loonie will be a definite loss.

Bank of Canada surprises markets with rate drop

In a surprise move, Canada's central bank, the Bank of Canada, reduced the overnight lending rate by a quarter of a percentage point. The reason given was the threat to the economy of plunging oil prices.

The move by the Bank reduced the lending rate from 1.0 percent to 0.75 percent. The Bank governor Stephen Poloz said: "The drop in oil prices is unambiguously negative for the Canadian economy. Canada's income from oil exports will be reduced, and investment and employment in the energy sector are already being cut." While the overall effect of the drop in oil prices may be negative, the impact will vary from province to province. With its huge oil resources, Alberta will suffer a significant drop in income from royalties and a decline in economic activity in the oil patch, but other provinces with industries that use oil welcome the lower prices for inputs. Consumers, airlines, truckers, and cabbies will be cheering the downward trend in fuel prices.

 The Toronto Stock Market (TSX) was up almost 300 points not long after the announcement. No doubt the reduced rate will be expected to boost consumer demand and help raise the level of economic activity. Almost no economists had been predicting the rate cut at this time but more were suggesting it could happen in the future. 

The rate decrease, follows upon a recent downgrading of both global growth and Canadian growth in the World Economic Outlook for 2015 published by the IMF. The forecast reduced global growth rates by 0.3 percent to 3.5 percent in 2015 and 3.7 percent in 2016. Canada's growth was downgraded 0.1 percent to 2.3 percent for 2015 and even more 0.3 percent for 2016 to just 2.1 percent. The drop in oil prices by about 50 percent since September 2014 was cited as the main reason for the IMF downgrade. In June of last year oil was at $105 US a barrel but now is well below $50 a barrel. The Bank of Canada also downgraded its prediction for Canada's growth in 2015 from 2.4 percent to 2.1 percent even lower than the IMF prediction, although contrary to the IMF, it sees a rise to 2.4 percent in 2016. 

The Bank made its projection on the assumption that oil prices will average about $60 dollars a barrel over the next two years. Derek Burleton, an economist at TD Bank said: "It is a significant move. It does show the Bank of Canada is worried about the big drop in the price of oil ... and what kind of uncertainty that poses in the next few quarters. I don't think they are panicking but I do think they're concerned about some of the uncertainty the recent slump in the price of oil does create for the economy." BMO economist, Michael Gregory, said: "Today’s BoC rate cut smacks of being a one-time 'insurance' move but in his presser, Governor Poloz indicated that if the world changes again (adversely for Canada) the Bank could take out more insurance."  

The Bank predicts that the lower oil and energy prices will reduce inflation at least temporarily but over the projected two year period will again approach the target two percent level. The Canadian dollar, the loonie, is trending much lower. BNN reports: Charles St-Arnaud, senior economist at Nomura Securities International Inc., said the drop in crude will prompt the central bank to lower its growth forecast by 0.5 percent.The loonie depreciated 1.4 percent to $82.55 cents US in Toronto Tuesday, at one point touching its weakest level since April 2009. Nomura forecasts it will reach 80 cents US by the middle of the year. The lower loonie will help Canadian exporters but imports from the US will rise in price and the flow of shoppers across the border may slow considerably as the loonie declines in value against the US dollar.