The Bank of Canada surprised us again. In another trend setting move, Canada’s central bank lowered the overnight interest rate from 0.75 percent down to 0.5 percent at today’s monetary policy update meeting in Ottawa.
The rate cut comes amid intense speculation from economists nationwide over the past several weeks. Economic data compiled by Statistics Canada throughout the first five months of 2015 was worse than expected, showing a larger than expected contraction in GDP and lower than anticipated exports of non energy related products.
This marks the second time this year that Bank of Canada Governor Stephen Poloz decided to reduce the overnight interest rate by 0.25 percent. Poloz shocked economists in January by ending a four and a half year freeze on the overnight rate and lowered the figure from 1 percent down to 0.75 percent.
At the time, Poloz characterized the January rate cut as “insurance” to protect the Canadian economy from the fallout of a collapse in oil prices. In today’s announcement, the Bank of Canada stated that weak economic data from the US and China in the first half of the year has devalued Canadian exports, adding risks to the domestic outlook.
“Real GDP is now projected to have contracted modestly in the first half of the year, resulting in higher excess capacity and additional downward pressure on inflation.”
The BoC did state that it anticipates growth to resume in the third quarter and carry through to the end of the year. Despite that optimism, the outlook for a return to full capacity was set back even further, with the bank now anticipating that inflation will not reach the target rate of 2 percent until the first half of 2017.
The Canadian dollar fell nearly a full cent following the rate cut announcement while banks and mortgage brokers digest the information. The news will surely trigger cuts in fixed mortgage rates advertised by the country’s largest lenders over the next few weeks, which will likely trigger renewed interest in the housing market.
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