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Updated: Bank Of Canada Surprises Markets, Dropping Target Rate To 0.75%
By Kitco NewsWednesday January 21, 2014 10:15 AM
Editor's Note: The article was updated to include more information from the BoC's monetary policy statement and comments from Capital Economics.
(Kitco News) - A sharp drop in oil prices has forced the Bank of Canada to surprise markets and cut its target rate by 0.25% overnight, bringing interest rates to new historic lows of 0.75%. The BoC’s bank rate is currently at 1.00% and its deposit rate is 0.50%.
In its monetary policy statement, the central bank said that the sharp decline in crude oil will be “negative for growth and underlying inflation in Canada.”
Economists at Capital Economics said the cut from the central bank has completely taken the market by surprise and with oil prices expected to remain weak, there is no guarantee that the bank will not drop rates even lower this year.
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| Image courtesy of the Bank of Canada: BoC Governor Stephen Poloz |
“We can't stress enough how much of a shock this rate cut was. Only a few days ago, Deputy Governor Timothy Lane said that there would not be any "drastic" changes in the policy outlook,” they said in a research note. “...If the price [of oil] remains below $50 at the time of the next meeting in early March then another rate cut to 0.50% would make sense.”
Oil was the worst performing commodity in 2014 dropping more than 49% by the end of the year. In its statement, the BoC said they expect oil prices to average about $60 a barrel in 2015. Currently, West Texas Intermediate crude oil futures are below the key level of $50, trading at $48.04 a barrel.
Although weaker oil prices are expected to boost global demand, especially in the United State, the bank said that oil importing countries like Canada will face headwinds from deleveraging in the energy sector and “lingering uncertainty.”
The bank added they are starting to see some strength in the economy outside of the energy sector but, “there is considerable uncertainty about the speed with which this sequence will evolve and how it will be affected by the drop in oil prices.”
Looking at the country’s growth prospects, the bank said that they see Canada’s gross domestic product expanding by 2.1% in 2015, down from previous forecast of 2.4%. The bank expects to see GDP growth of 2.4% in 2016. “The economy is expected to return to full capacity around the end of 2016, a little later than was expected in October,” the bank said.
On the inflation front, the central bank said they expect total consumer inflation to fall below its “inflation-control range during 2015,” but eventually return to the 2% target.
By Neils Christensen of Kitco News; nchristensen@kitco.com
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