Bank of Canada Slashes Rate to .5%

Stephen Poloz 9

CBJ – It came as little surprise when the Bank of Canada issued a statement on Wednesday morning on behalf of Governor Stephen Poloz (pictured) that the bank was lowering its benchmark interest rate to 0.5%. It’s the second time this year that the central bank has lowered the rate in an effort to stimulate the economy after holding steady for almost four years at an even 1% starting in late 2010..

“The bank’s estimate of growth in Canada in 2015 has been marked down considerably from its April projection,” the bank said in a statement. “Real GDP is now projected to have contracted modestly in the first half of the year,” which is the bank’s way of saying it expects the Canadian economy entered into a technical recession in the first half of 2015 — defined as two consecutive quarters of shrinking gross domestic product.

The bank’s rate — also known as the “target for the overnight rate” — is a 25 basis-point reduction from its previous 0.75% level.

The loonie lost almost a cent to 77.57 cents U.S. on word of the rate cut. Although a rate cut can stimulate the economy, it can also drive the currency lower because it makes Canada’s economy less attractive to foreign investors.

Poloz spoke with the media this morning following the announced rate cut. When asked whether he believed Canada had sunk into recession, given that there have been two successive quarters of negative GDP growth, he was careful in his wording.

“I’m not going to engage in a debate about what we call this,” Poloz answered. “There’s no doubt we have worked our way through a mild contraction.”

For 2015, the Bank of Canada is now forecasting growth of 1.1%, down from its earlier forecast of 1.9%, while 2016 is expected to see growth of 2.3%, down from 2.5%.

“The facts have changed quite quickly actually in the last two to three months,” Poloz said.

Poloz says several factors point to a return to growth in the third quarter.

“Exports are projected to return to solid growth, supported by continued improvements in U.S. demand and a rebound in automotive exports following temporary shutdowns for retooling at the beginning of the year,” he says. “Business investment will remain a source of drag, however, as the energy sector continues to adjust to low oil prices.”

The International Monetary Fund downgraded its forecast for Canada last week to just 1.5% compared with its earlier prediction of 2.2%.

@CanBizJournal

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