Just a heads up for everyone!!! Data Release: The Bank of Canada surprises markets with an interest rate cut • The Bank Canada surprised markets by cutting its overnight rate by 25 basis points to 0.75%. • This decision is in response to the recent sharp drop in oil prices, which will have a negative impact on both growth and underlying inflation in Canada. • Interestingly, the Bank put aside its recent convention of assuming the spot price for oil (which is around $46/bbl). The Banks new forecast assumes an oil price of around $60 per barrel. • The Bank continues to see improvement in Canadas non-energy exports, which have been a weak spot since the recession. But, there is considerable uncertainty about the speed with which the improvement will take place and how it will be affected by lower oil prices. Moreover, the Bank sees an adverse impact on incomes and wealth from lower oil prices, reducing domestic demand growth. • In the Monetary Policy Report (MPR) that accompanied the interest rate announcement, the Bank maintained its outlook for the global economy and revised up its outlook for the U.S. economy relative to October, citing lower oil prices as giving a boost to both. However, the Canadian economic outlook for 2015 has been revised down markedly on lower oil prices, to 2.1% from 2.4% in October. Most of the downward revision was concentrated in the first half of the year, and is largely the result of a weaker business investment projection. 2016 growth has been revised up slightly to 2.4% (from 2.3% in October). The Bank expects the economy to return to full capacity around the end of 2016, later than was expected in the October MPR. • Additionally, the Bank of Canada slashed its total CPI inflation outlook for every quarter of 2015, with the first 3 quarters coming in between 0% and 1%. Meanwhile, they have raised their projection of core inflation over the same period, as a result of less capacity in the economy than was believed in October and the pass through from higher import prices. Key Implications • After more than four years of steady interest rates, the Bank of Canada has made a change, but unexpectedly it was a cut. The Bank highlighted how the oil price shock increases both downside risks to the inflation profile and financial stability risks. The Banks rate cut is intended to provide insurance against these risks, and support the sectoral adjustment needed to strengthen investment and growth. The Canadian dollar has weakened on the news, to just over 81 U.S. cents, and a weaker loonie will provide a boost to Canadas exporters. This emphasis on the insurance provided by an interest rate cut is consistent with Governor Polozs increased emphasis on a risk management framework for monetary policy. • While the Bank of Canada has taken out a quarter-point insurance policy in the face of the oil price shock, TD does not believe that this is a start of a rate cutting cycle. Oil prices are likely to head higher in the second half of the year, and with increased momentum in the U.S. economy, Canadas economy is expected to weather the oil price shock, with the Bank of Canadas own growth expectations for 2016 revised up slightly. Leslie Preston, Economist
Posted on: Wed, 21 Jan 2015 19:32:03 +0000
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