Canada: Bank of Canada reduces overnight rate for the first time in over four years
January 21, 2015
At its 21 January monetary policy meeting, the Bank of Canada (BoC) decided to lower the overnight target rate by 25 basis points from 1.00% to 0.75%. This is the first time since September 2010 that the Bank has decided to reduce the overnight target rate and the decision was taken in response to the recent sharp drop in oil prices. The move contrasted market expectations of the overnight rate remaining unchanged at 1.00%.
In terms of economic developments, the Bank commented that Canada showed broad-based growth in the recent quarter. Looking beyond the energy sector, the latest economic data point to an improvement in foreign demand, stronger exports and increased investment. However, the oil price shock is creating uncertainties regarding the effect that the drop in oil prices will have on business investment in the energy-producing sector as well as on the country’s terms of trade. The Bank added that, “the negative impact of lower oil prices will gradually be mitigated by a stronger U.S economy, a weaker Canadian dollar, and the Bank’s monetary policy response.”
Regarding price developments, the BoC commented that lower oil prices will put downward pressure on inflation. The Bank expects inflation to be below its 2.0% target this year and sees it moving closer to the target next year. In conclusion, the Bank emphasized that the cut in the overnight target rate is appropriate given the downside risks to the inflation and financial stability.
Author: Dirina Mançellari, Senior Economist