Bank of Canada cuts key interest rate to 0.5 percent

AP News
Posted: Jul 15, 2015 2:36 PM

TORONTO (AP) — Canada's central bank cut its key interest rate Wednesday as it slashed its economic outlook and predicted a pullback in the second quarter due to the impact of lower oil prices and weaker demand for exports.

The Bank of Canada cut its target for the overnight rate by a quarter of a percentage point to 0.5 percent. In response, the Canadian dollar plunged to a post-recession low of 77.29 U.S. cents Wednesday afternoon, down 1.2 cents from the previous close.

For 2015, the bank is now forecasting growth of 1.1 percent, down from its earlier forecast of 1.9 percent, while 2016 is expected to see growth of 2.3 percent, down from 2.5 percent.

"Global economic developments have been quite disappointing," Bank of Canada governor Stephen Poloz told a news conference.

"Canada's economy is undergoing a significant and complex adjustment," he said. "Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target."

The bank hopes making it cheaper for consumers and companies to borrow money will help. This is the second time this year the bank has reduced its target for the overnight rate.

In its monetary policy report, the bank forecast the economy contracted at an annual pace of 0.5 percent in the second quarter compared with its April forecast for growth at a pace of 1.8 percent. The drop follows a contraction at an annual pace of 0.6 percent in the first three months of the year.

A contraction by the economy in the second quarter would mean the country slipped into a recession in the first half of the year, but the Bank of Canada did not make that distinction, noting that the downturn was focused in the energy sector.

"A sharp decrease in the price of oil, slower demand from the U.S., the debt crisis in Greece, as well as economic and market volatility in China all had a negative impact on Canada in the first half of the year," said Canada's finance minister, Joe Oliver.

The bank said several factors point to a resumption of growth in the third quarter.

"Importantly, exports are projected to return to solid growth, supported by continued improvements in U.S. demand and a rebound in automotive exports following temporary shutdowns for retooling at the beginning of the year," it said.

"Business investment will remain a source of drag, however, as the energy sector continues to adjust to low oil prices."

The Bank of Canada estimated that investment in the oil and gas sector will contract by close to 40 percent this year, compared with an earlier estimate of about 30 percent.