Bank of Canada Shocks Market and Lowers Interest Rate

The Bank of Canada has made a surprising move and lowered the interest rate despite the falling oil prices.

The overnight rate was lowered by one quarter of one percentage point, to 0.75 per cent, citing the sharp drop in oil prices. The Bank says that the low oil prices will be negative for growth and underlying inflation in the country.

“Inflation has remained close to the two per cent target in recent quarters,” the Bank of Canada said in its release. “Core inflation has been temporarily boosted by sector-specific factors and the pass-through effects of the lower Canadian dollar, which are offsetting disinflationary pressures from slack in the economy and competition in the retail sector. Total CPI inflation is starting to reflect the fall in oil prices.”

Oils decline over the past six months is expected to boost global economic growth, especially in the United States, but there are lingering uncertainties. The Bank assumed that oil prices would be around $60 US per barrel and prices are currently much lower than that.

The rate, which now sits at 0.75 per cent, had been at one per cent since September 2010 and the cut is expected to result in lower inter rates for variable rate mortgages, lines of credit and other loans.

“The oil price shock increases both downside risks to the inflation profile and financial stability risks,” the statement goes on to say. “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 projection horizon.”

The next announcement for the overnight rate is on March 4^th, 2015 and the next full update from the Bank is expected to be published on April 15^th, 2015.