Newsmaker of the day: The Bank of Canada

Newsmaker, Jan. 21: Down goes the interest rate

BoC Policy Report 20150121

That gasp you heard this morning was the nation’s business leaders, economists, political strategists and journalists learning that the Bank of Canada was lowering its target for the overnight rate by one-quarter of one percentage point—a move that shocked market analysts.

With oil prices experiencing a dramatic decline, the Bank moved to lower interest rates in hopes of reinforcing the national economy. “This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada,” the Bank said. “The oil price shock increases both downside risks to the inflation profile and financial stability risks. 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.”

A recap of our live-chat with economic experts
John Geddes looks at the political ramifications of the cut

There are long-term fiscal impacts and political ramifications to consider, but in the immediate moments after the announcement, the loonie tumbled below 81 cents and experts were left to sort out what this might mean for where the economy is headed.

The Canadian Press tells us five things to know about today’s announcement:

— The Bank of Canada believes low oil prices are overall negative for the Canadian economy.

— By cutting its target for the overnight rate, the central bank is trying to push down the interest rates charged by Canada’s big banks, making it cheaper for companies to borrow money to grow their businesses.

— A rate cut by the central bank likely means lower interest rates for variable rate mortgages, lines of credit and other loans based on the prime rate, likely to boost consumer spending.

— The loonie immediately fell by more than 1.5 cents against the U.S. dollar. A lower dollar makes Canadian goods cheaper for U.S. buyers, helping to stimulate exports but increasing the cost of imports.

— The Bank of Canada used an estimate of US$60 for the price of oil in making its decision. Oil is trading below US$50 today. If oil stays where it is the central bank expects the economy to grow even slower than it has forecast.

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