And Another Shocker: Bank Of Canada Stuns Market With Completely Unexpected Rate Cut

Unexpected to most, The Bank of Canada cut its benchmark interest rate to 0.75% citing financial stability risks and worried about downside inflation risks. The press release is extremely negative...

 

Prophetically noted earlier...

As Bloomberg headlines reports...

  • *BANK OF CANADA CUTS BENCHMARK INTEREST RATE TO 0.75%
  • *OIL SHOCK BOOSTS DOWNSIDE CPI, FINANCIAL STABILITY RISKS: BOC
  • *BOC DELAYS FULL ECONOMIC RECOVERY TO AROUND END OF 2016
  • *BOC CUTS AVERAGE 2015 GROWTH OUTLOOK TO 2.1% FROM 2.4%
  • *BANK OF CANADA ASSUMES OIL PRICES AROUND $60 A BARREL
  • *WEAKER CANADA TERMS OF TRADE TO ADVERSELY AFFECT INCOMES: BOC
  • *BOC SEES ENERGY-EXPORT GROWTH FALLING TO 1%, FROM 6% IN 2014
  • *OIL DROP TO HAVE SIGNIFICANT EFFECT ON PUBLIC FINANCES: BOC
  • *BOC SEES ABOUT 30% CUT TO OIL AND GAS INVESTMENT IN 2015
  • *MAGNITUDE OF OIL SHOCK CREATES EXCEPTIONAL UNCERTAINTY: BOC

 

BoC Press release:

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada.

Inflation has remained close to the 2 per cent target in recent quarters. Core inflation has been temporarily boosted by sector-specific factors and the pass-through effects of the lower Canadian dollar, which are offsetting disinflationary pressures from slack in the economy and competition in the retail sector. Total CPI inflation is starting to reflect the fall in oil prices.

Oil’s sharp decline in the past six months is expected to boost global economic growth, especially in the United States, while widening the divergences among economies. Persistent headwinds from deleveraging and lingering uncertainty will influence the extent to which some oil-importing countries benefit from lower prices. The Bank’s base-case projection assumes oil prices around US$60 per barrel. Prices are currently lower but our belief is that prices over the medium term are likely to be higher.

The oil price shock is occurring against a backdrop of solid and more broadly-based growth in Canada in recent quarters. Outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment, and employment growth. However, there is considerable uncertainty about the speed with which this sequence will evolve and how it will be affected by the drop in oil prices. Business investment in the energy-producing sector will decline. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth.

Although there is considerable uncertainty around the outlook, the Bank is projecting real GDP growth will slow to about 1 1/2 per cent and the output gap to widen in the first half of 2015. 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. The Bank expects Canada’s economy to gradually strengthen in the second half of this year, with real GDP growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016. The economy is expected to return to full capacity around the end of 2016, a little later than was expected in October.

Weaker oil prices will pull down the inflation profile. Total CPI inflation is projected to be temporarily below the inflation-control range during 2015, moving back up to target the following year. Underlying inflation will ease in the near term but then return gradually to 2 per cent over the projection horizon.

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.

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The reaction in CAD is extreme...

 

to its weakest since April 2009