Bank of Canada shocks markets with cut in key interest rate

The Bank of Canada shocked markets today by cutting its key overnight lending rate by a quarter of a percentage point, citing the economic threat posed by plunging oil prices...

The overnight rate, which moves down to 0.75 per cent, had been at one per cent since September 2010. The cut will result in lower interest rates for variable rate mortgages, lines of credit and other loans that float with prime rates.

Virtually no economists had been predicting a rate cut.

"It is a significant move," TD Bank economist Derek Burleton told CBC News. "It does show the Bank of Canada is worried about the big drop in the price of oil ... and what kind of uncertainty that poses in the next few quarters. I don't think they are panicking but I do think they're concerned about some of the uncertainty the recent slump in the price of oil does create for the economy."

Oil prices have plunged to less than $50 US a barrel from more than $105 US in June last year.

In the wake of the rate cut, the loonie plunged more than 1.7 cents to 80.82 cents US in early afternoon trading — its lowest level since late April 2009.

The central bank scaled back its forecast for the country's economic growth this year. It now sees 2015 growth of 2.1 per cent, down from 2.4 per cent.

"The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar and the Bank [of Canada's] monetary policy response," it said.​

The central bank says real GDP growth will be just 1.5 per cent in the first half of this year and will pick up in the second half. For 2015 as a whole, it sees economic growth of 2.1 per cent, rising to 2.4 per cent in 2016.

The bank bases its revised growth forecast on the assumption that oil will average $60 US a barrel over the next two years.

The central bank said the oil price plunge increases downside risks to both inflation and financial stability. It said Wednesday's action was designed "to provide insurance against these risks."...

Several analysts say further rate cuts cannot be ruled out...

This has been excerpted from 21 January 2015 article by the CBC News.