The Bank of Canada is cutting its key interest rate for the second time this year, citing a larger-than-expected first half contraction and a "puzzling" stall in non-energy exports.
The central bank lowered its benchmark overnight rate by a quarter percentage-point Wednesday to 0.5%, blaming faltering global growth, disinflation and low prices for oil and other commodities. The Canadian dollar fell more than a cent in the wake of the decision.
The bank stopped short of characterizing the economy’s first-half stall as a recession, even a mild one. But some economists say that is exactly what Canada is facing.
The latest rate cut marks a sudden about-face by Bank of Canada Governor Stephen Poloz, who has repeatedly insisted that the economic hit from the oil price collapse would be quickly offset by surging non-oil exports, such as car parts, lumber and machinery and equipment. He had characterized his earlier January rate cut as "insurance."
But six months later the rebound remains elusive, in spite of a much cheaper Canadian dollar, now worth less than 80 cents U.S.
The bank acknowledged in its latest forecast, also released Wednesday, that the failure to get a lift from non-energy exports is “puzzling.”
Making matters worse a massive plunge in business investment – down 16% in the first quarter – has become a dead-weight on the economy. The bank now says it expects investment in Canada’s oil patch to plummet close to 40% this year, significantly worse than the 30% it initially thought, as long-term investments in the oil sands are delayed or put on hold until the price of crude comes back.
A lower overnight rate typically prompts banks to cut rates on home mortgages and other loans – a situation that could exacerbate record household debt levels in Canada and add fuel to the hot housing market in cities such as Toronto and Vancouver.
Related Stories
