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Bank of Canada cuts key rate to 0.5 per cent, slashes economic outlook

OTTAWA – The Bank of Canada cut its key interest rate on Wednesday, slashed its outlook for the economy and predicted a contraction in the second quarter due lower oil prices and slumping exports — but the central bank governor wouldn’t describe the country’s economic woes as a recession.

The bank cut its target for the overnight rate by a quarter of a percentage point to 0.5 per cent, sending the Canadian dollar tumbling to its lowest levels in years.

The central bank also explained that its lower outlook for economic growth — from 1.9 per cent earlier this year to 1.1 per cent — is due to Canadian oil producers cutting their investment plans by close to 40 per cent this year, compared with an earlier estimate of about 30 per cent.

Slowing growth in China and non-resource exports faltering — a trend the bank described as “a puzzle that merits further study” — have also played a part in Canada’s economic difficulties.

Nonetheless, Bank of Canada governor Stephen Poloz said exports are expected to fuel growth in the second half of the year.

“The U.S. economy does appear to be gathering more momentum and so we are quite confident that the export side will resume its growth track which we saw in the latter half of 2014,” Poloz told a news conference.

“Along with the action that we’ve taken today, (that) makes us quite confident as we look into the second half of the year.”

An economic contraction in the second quarter would mean the country slipped into a recession in the first half of the year, but Poloz wouldn’t use the r-word.

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

The rate cut marked the second time this year that the Bank of Canada has reduced its target for the overnight rate. By slashing it, the central bank is hoping to jump-start the economy by making it cheaper for consumers and companies to borrow money.

In response, the Canadian dollar plunged to a post-recession low. The loonie was down more than a full U.S. cent Wednesday afternoon to levels not seen since March 2009, when Canada was in the midst of a deep recession.

At one point, Canada’s dollar was worth about 77.29 cents US, down 1.2 cents from the previous close, but had been even lower earlier in the day.

TD Canada Trust was the first of Canada’s big banks to respond, though it only passed on part of the rate cut as it reduced its prime rate by a tenth of a percentage point to 2.75 per cent. The bank announced a further reduction late Wednesday to 2.70 per cent.

The Royal Bank, CIBC, ScotiaBank and BMO also decreased their prime rates to 2.70 per cent.

Moves in the prime rate directly affect the amount charged on loans such as variable rate mortgages and floating rate lines of credit.

Economists had been split in their predictions about what the Bank of Canada would do, with most, but not all, calling for a rate cut.

“It’s not a true recession, since an employment decline hasn’t joined in with the tumble in output measures, but the GDP decline opened a window for a further ease by a dovishly inclined Bank of Canada governor,” CIBC chief economist Avery Shenfeld said following the bank’s announcement.

In its monetary policy report, the Bank of Canada forecast the economy contracted at an annual pace of 0.5 per cent in the second quarter compared with its April forecast for growth at a pace of 1.8 per cent.

However, the central bank predicted growth at an annual pace of 1.5 per cent in the third quarter, followed by 2.5 per cent in the last three months of the year. That compared with its earlier forecast for growth of 2.8 per cent and 2.5 per cent for the third and fourth quarters respectively.

For all of 2015, the Bank of Canada is now forecasting growth of just 1.1 per cent, down from its earlier forecast of 1.9 per cent.

The bank said several factors point to renewed growth in the third quarter, helped in part by the retroactive child-care benefit cheques Ottawa is poised to send out this month.

Poloz said if matters don’t unfold as expected, the Bank of Canada still has room to move manoeuvre as well as other tools in its monetary policy toolbox.

“If we are disappointed one way or the other, we have room to move,” he said.