The Bank of Canada (BoC) stunned markets Wednesday when it announced a reduction of interest rates by 0.25 percent to a near record low of 0.75 percent, a move that will lower borrowing costs. BoC Governor Stephen Poloz cited the possibility of weak economic growth and the threat of deflation because of falling oil prices.
Poloz explained the policy decision as an “insurance” policy against the various risks posed against Canada because of today’s tumbling oil prices. He also warned that the plunge in oil prices could worsen household debt levels amid higher unemployment and income reductions. However, there are fears Canadian consumers would begin to take on even more debt because of diminishing borrowing costs – the average Canadian maintains around $27,000 in consumer debt.
He added that it shouldn’t have been much of a surprise because the central bank had been warning about a rate cut for a couple of months now amid declining oil prices.
“Oil’s sharp decline in the past six months is expected to boost global economic growth, especially in the United States, while widening the divergences among economies,” said Poloz in a statement. “Persistent headwinds from deleveraging and lingering uncertainty will influence the extent to which some oil-importing countries benefit from lower prices. The Bank’s base-case projection assumes oil prices around US$60 per barrel. Prices are currently lower but our belief is that prices over the medium term are likely to be higher.”
The nation’s gross domestic product is expected to slow to 1.5 percent in the first half of 2015, and later boost to 2.5 percent in the second half of the year.
Interest rates have remained the same since Sept. 2010. The last time there was this long of a time where rates were unchanged was during the 1950s. The rate cut also saw the loonie fall to a six-year low against the United States dollar, while the Toronto Stock Exchange’s main index jumped 1.8 percent.
Financial experts posit that it’s possible the BoC could very well lower interest rates again sometime this year. The rationale is that markets didn’t expect a rate cut so why wouldn’t the central bank incorporate another reduction in rates?
Canada’s economy is primarily driven by oil production in Alberta, Saskatchewan and the nation’s east. The situation has gotten so bad in these regions that leaders are mulling over the possibilities of implementing new taxes, raising taxes or making budget cuts.
In fact, according to the Canadian Association of Petroleum Producers (CAPP) (via The Canadian Press), the projected oilpatch investment will total just $46 billion this year, down from $69 billion in 2014.
Speaking in an interview with CBC News in Davos, Switzerland during the World Economic Forum, Finance Minister Joe Oliver said he was not surprised by the move by the BoC at all, but noted that he was not informed ahead of time that Poloz would slash interest rates.
Oliver mentioned the federal budget, and said that he is rejecting suggestions to introduce a slight federal deficit in order to spur the economy. Oliver, who delayed the release of the federal budget by another month to analyze the state of oil, wants a balanced budget and confirmed Ottawa will not be falling back into a deficit.
