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article imageBank of Canada slashes key rate as economy falters, exports stall

By Caroline Leopold     Jul 15, 2015 in Business
Stephen Poloz avoided using the word recession, but the Bank of Canada Governor said the country needs interest rate relief because the economy is in contraction.
The central bank lowered its trend-setting overnight rate a quarter percentage point Wednesday to 0.50 per cent — the second rate cut in six months.
The central bank also adjusted its forecast for the Canadian economy, admitting for the first time that the gross domestic product will likely decline in both the first and second quarters. The bank said growth for the year is estimated to reach just 1.1 per cent, a more pessimistic prediction from the nearly 2 per cent it was forecasting just three months ago.
Two consecutive quarters of a slowdown usually defines whether an economy is in recession. However, Poloz pointedly avoided using the word and opted to use the word contraction instead.
“Canada’s economy is undergoing a significant and complex adjustment,” the bank said in a statement accompanying its rate decision, according to The Globe and Mail. “Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.”
Poloz said the bank anticipated that cheaper crude prices would hurt exports, but the failure of non-energy exports to increase is a “puzzle” that the bank is trying to understand.
The Bank of Canada’s key overnight rate directly influences private-lending interest rates for lines of credit and variable rate mortgages. The lowered rate spurs lower borrowing rates for credit, which are already near historic lows.
Canada's major banks decreased their prime lending rate by 0.3 percentage points, which is a shallower cut than the central bank. The major banks are being more cautious with lending.
In reaction to the news, the Canadian dollar fell more than a cent, reaching the lowest level seen since 2009, when Canada was in a recession. The loonie dropped as low as 77.2, but closed at 77.4 cents to the U.S. dollar. The drop was expected because rate cuts normally drive down currency value because such cuts make the country's economy less appealing to foreign investors.
More about Canada economy, Oil prices, Bank of Canada
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