OTTAWA, Canada—With much less controversy than in January, the Bank of Canada cut its overnight rate target to 0.50 percent from 0.75 percent on Wednesday, July 15, seeing the worsening effects on the Canadian economy of the oil price shock and faltering growth in the U.S. and China.
With four straight months of GDP declines and weaker-than-expected exports, many economists were calling for a rate cut at the BoC’s July meeting, which also included the release of a new monetary policy report (MPR).
At its last rate-setting meeting on May 27, the Bank believed the Canadian economy was behaving in line with its then most recent projections from April’s MPR. No surprise emerged, as rates were kept unchanged.
The tune being sung then was that the oil price shock was more front-loaded but not larger than anticipated, and the pickup in non-energy exports due to a strengthening U.S. economy would keep Canada on track to close its output gap and reach its 2 percent inflation target by the end of 2016.
However, the Bank’s optimism or expectation has proven unrealized, which seems to be an ongoing global theme as the recovery from the financial crisis drags on.
“What has happened is the facts have changed quite quickly actually in the last two to three months,” Bank of Canada governor Stephen Poloz said during a press conference.
Business investment in the energy sector has fallen further as oil prices are expected to remain low. At the start of the year, the anticipated spending cut by oil patch companies was about 30 percent, but now it is around 40 percent. Thus it would seem the oil price shock is proving to be larger, in addition to being more front-loaded.
Another factor depressing Canada’s economy is the slowing of China’s economy as it transitions to being more domestically driven. This has implications for Canada’s commodities exports both in terms of value and volume.
