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.”
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.
There has been no change to the Bank of Canada rate since September 2010 until the move today.
2015 has started off with quite a bit of speculation as to what rates would do throughout the year. Just a couple of weeks ago, the media were reporting that we could expect to see rates going up due to the broad recover of the US economy.
However, most recently Morgan Stanley was quoted in the National Post as saying “Don’t look for another interest rate hike for two more years; in fact, there is a one in three chance the Bank of Canada will actually cut rates before the end of this year”.
The next scheduled Bank of Canada date for announcing the overnight rate target is March 4, 2015.