While the Bank of Canada was widely expected increase its overnight lending rate in 2015, the central bank announced it was doing the opposite today, cutting the rate a quarter per cent to 0.75. The surprising decision was a result to the sharp drop in oil prices over the past six months, which the bank believes will be negatively impact growth and inflation in Canada.
“We generally prefer markets not by surprised by what we do,” said Stephen Poloz, the Governor of the Bank of Canada, in a press conference. The Canadian dollar fell to 80.77 cents US after the announcement was made. Ahead of this morning’s announcement, the Loonie tumbled 1.1 cents against the US dollar yesterday, closing at about 82.6 cents US. However, the Toronto Stock Exchange hit a two-week high following the announcement.
This is the first time the rate has changed since September 2010. Poloz said rate discussions were dominated by talk of falling oil prices, which are “unambiguously negative for the Canadian economy.”
The rate cut was meant to cushion the decline in employment and income that are expected to accompany falling oil prices.
Housing bears have long pointed to low interest rates as a concern, as Canadian debt levels reached new highs and income levels largely stayed flat.
The central bank addressed these concerns in the Monetary Policy report: “While it is true that a lower profile for interest rates may exacerbate household imbalances at the margin by encouraging more borrowing, the far more important effect will be to mitigate those imbalances by cushioning the decline in income and employment caused by lower oil prices.
“Ultimately, we believe the most reliable way to reduce financial stability risks is to do what we can to get the economy back to full capacity and sustainable inflation.”
Here’s how Twitter reacted to the shocking move:
Since 2013 I’ve consistently said that the BoC’s next move was more likely to be a cut than a hike. You’re welcome, world
— Ben Rabidoux (@BenRabidoux) January 21, 2015
Bank of Canada Poloz rejects suggestion from reporter that his rate cut today is “drastic” — Paul Vieira (@paulvieira) January 21, 2015
Does the Bank of Canada rate cut mean society is lost and we’ll be roasted on spits to feed the fascist militias of surviving billionaires? — Benjamin Massey (@Lord_Bob) January 21, 2015
BoC MPR explains that low oil prices aren’t net stimulative for Cdn consumers bcuz of the hit to employment & negative terms of trade shock. — Luke Kawa (@LJKawa) January 21, 2015
Very interesting to see the BOC lowering rates. But is that a sign of a worsening economy or a temp measure to kickstart growth? #cdnecon
— David George-Cosh (@itsdgc) January 21, 2015