OTTAWA (NEWS1130) – The dollar dropped another cent after a cut in interest rates took just about everybody by surprise this morning.
The Bank of Canada’s key rate is now at a historically low 0.75 per cent.
We were expecting big cuts to the economic and inflation outlook from Bank of Canada — with the collapse of the price of oil, this morning’s report on monetary policy was not going to be rosy — but no one really expected a cut to the main interest rate right now.
“The possibility of a rate cut was acknowledged but by relatively few in the market. Yesterday’s one-cent plunge in the dollar was really in anticipation of softer language from the Bank of Canada about future rate increases, rather than an outright cut. That’s why this morning’s stunner has shaved another cent off the loonie,” says News1130 Business Editor Richard Dettman.
What drove the Bank of Canada to make such a surprising move?
“One word: oil. It’s canada’s biggest export and its price is down more than half since last summer. So The central bank has pushed its forecast for full economic recovery all the way back to 2016. Last fall it figured oil would recover to $85 US a barrel, but now it’s predicting about $60,” Dettman adds.
Oil prices have plunged 55 per cent since last June because of a supply glut and have fallen about 40 per cent just since the end of November after OPEC said it production levels wouldn’t change.
The Bank of Canada is predicting GDP growth will slow to about 1.5 per cent in the first half of this year.