Bank of Canada shocker: key interest rate drops to 0.75% amid oil slump threat

The looming threat of sliding oil prices forced the Bank of Canada to drop its trend-setting interest rate Wednesday, a surprising move that shows just how much the country’s economic outlook has soured in a matter of months.

OTTAWA — The looming threat of sliding oil prices forced the Bank of Canada to drop its trend-setting interest rate Wednesday, a surprising move that shows just how much the country’s economic outlook has soured in a matter of months.

The central bank, which nudged its key rate down to 0.75 per cent from one per cent, said the rapid oil-price collapse has created many unknowns around economic growth in the oil-exporting nation.

Until the effects of oil’s late-2014 tailspin started to trickle through, Canada appeared to be on the cusp of a promising post-recession rebound — and inching closer to a rate hike.

“The drop in oil prices is unambiguously negative for the Canadian economy,” governor Stephen Poloz said.

“Canada’s income from oil exports will be reduced, and investment and employment in the energy sector are already being cut.”

The central banker noted there will be some offsets, but said they will be partial and of uncertain timing.

“Canadian consumers will spend less on energy, but they could save some of the windfall rather than spend it; U.S. economic growth will be stronger, which — along with a lower Canadian dollar — should boost Canadian exports, but the speed of the export response is uncertain given the export capacity losses of the last decade,” Poloz said.

The loonie dropped after the announcement by 1.12 cents US to 81.48 cents US — its lowest level since late April 2009, the last time the bank cut its overnight rate.

The decision Wednesday marked the first time the rate budged at all since September 2010 when the central bank raised it by a quarter point to one per cent.

The Bank of Canada was widely expected to once again stand pat on its rate Wednesday, with most economists projecting an increase in late 2015 or early 2016.

The central bank, however, predicts the impact of falling oil prices to overshadow encouraging signs of economic life spotted outside the weakening energy sector, such as rising foreign demand, a boost in exports and job growth.

“The oil-price shock is occurring against a backdrop of solid and more broadly based growth in Canada in recent quarters,” the bank said.

“While business investment had been showing some encouraging signs in the third quarter of 2014, the near-term outlook appears much-less positive.”

The bank also said the oil-price drop will have an adverse effect on income and wealth, which would reduce the growth of domestic demand. It also expected additional negatives on consumption and public finances.

The rate decrease aims to soften the blow of cheaper crude by providing “insurance” against risks posed by low oil to the country’s inflation and its financial stability.

It predicted Canada’s fortunes to also receive a boost from the ever-strengthening U.S. economy, an country expected to benefit from lower crude prices.

The bank’s concerns over the oil slump come as some Canadian industries reel from the sharp plunge in crude prices, which are down more than 55 per cent since June.

The decline in oil prices is also expected to shave billions of dollars from the bottom lines of federal and provincial governments.

Last week, the federal government took the rare step of delaying the budget until at least April, so it could assess the effect of tumbling crude.

In November, federal Finance Minister Joe Oliver warned falling oil prices could cut $2.5 billion per year from the federal books between 2015 and 2019. Since that calculation, the price of crude has tumbled even further, from about US$80 per barrel to under US$50.

Experts believe the federal books for 2015-16 will come close to running another deficit, despite the Harper government’s assertions it will deliver on its long-held vow to balance the budget.

An analysis Tuesday by the Conference Board of Canada predicted plummeting world oil prices to gnaw $4.3 billion from the Canadian government’s 2015 income and deliver a nearly $10-billion hit to the provinces in royalties and tax revenue.

In the monetary policy report Wednesday, the central bank predicted the country’s headline inflation rate to temporarily dip to one per cent — below the bank’s target range — before climbing back up to two per cent in the second half of the year.

The central bank also highlighted persistent problems in Canada’s labour market, where it found long-term unemployment was still close to its “post-crisis peak.”

It said average hours worked remained low and the proportion of people who could only find part-time work was still high.

The bank predicted the pace of Canada’s economic growth — measured by the real gross domestic product — to slow to roughly 1.5 per cent in the first half of 2015 and for the output gap to widen.

It projected the Canadian economy to gather steam in the second half of the year, allowing real GDP growth to average 2.1 per cent in 2015 and 2.4 per cent in 2016.

The bank’s estimates were based on oil prices of US$60 per barrel, which is higher than current prices that are below US$50.

The report said if oil were to remain close to US$50, real GDP growth would dip to 1.25 per cent in the first half of 2015.

In its last monetary policy report — in October — the Bank of Canada predicted 2.4 per cent growth for 2015.

Since then, oil prices have dropped by more than 40 per cent.

In his October report, Poloz warned the extended period of an already-low interest rate of one per cent had propelled consumer spending to near-record-high housing prices and debt.

At the time, Poloz cautioned the low-rate environment had left Canadian households exposed to economic shocks.

On Wednesday, the bank reiterated the warning that Canada’s indebted households remained vulnerable.

A fresh unknown — the oil collapse — has now been added to the mix.

“The precise magnitude of the impact of the fall in oil prices on household income, spending and, ultimately, on existing imbalances is highly uncertain,” said the report, which still maintained its prediction of a soft landing for the housing market.

The Bank of Canada is scheduled to make its next interest-rate announcement March 4, while its next monetary policy report is due April 15.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Samantha Sharpe, 25, was stabbed to death at Sunchild First Nation on Dec. 12, 2018. Chelsey Lagrelle was sentenced to 4.5 years in prison for manslaughter in a Red Deer courtroom on Tuesday. Photo contributed
Central Alberta woman sentenced to 4 1/2 years for stabbing friend to death in 2018

Chelsey Lagrelle earlier pleaded guilty to stabbing Samantha Sharpe during argument

Alberta's chief medical officer of health Dr. Deena Hinshaw says Albertans need to keep making safe choices to start bending the curve back down. (Photo by Chris Schwarz/Government of Alberta)
One new COVID-19 death in Red Deer, 257 additional cases province-wide

Red Deer sits at 459 active cases of the virus

Olds College logo
Olds College to host free, online agriculture celebration next month

Olds College will host a free live-streamed agriculture event next month. The… Continue reading

Alberta Health Services Logo
AHS upgrading online immunization booking tool

Alberta Health Services’ online booking tool for COVID-19 immunizations will be temporarily… Continue reading

Eric Rajah and Brian Leavitt were awarded with Meritorious Service Medals by the Governor General for co-founding the Lacombe-based charity A Better World. The agency’s goal is to reduce poverty and boost education in Africa and Afghanistan. (Contributed photo)
Co-founders of Lacombe-based charity receive one of Canada’s highest honours

Eric Rajah, Brian Leavitt of A Better World are honoured by the Governor General

Red Deer dogs Bunsen and Beaker helped save a missing pet recently. The two dogs have more than 80,000 followers on Twitter. (Contributed photo)
WATCH: Red Deer science dogs help save lost pet

Red Deer science-communicating dogs Bunsen and Beaker helped rescue a missing pet… Continue reading

FILE - In this Oct. 28, 2020, file photo, FBI Director Christopher Wray speaks during a virtual news conference at the Department of Justice in Washington. Wray is set to testify for the first time since the deadly Jan. 6 deadly riot at the U.S. Capitol. (Sarah Silbiger/Pool via AP)
FBI chief warns violent ‘domestic terrorism’ growing in US

FBI chief warns violent ‘domestic terrorism’ growing in US

In this image from KYMA law enforcement work at the scene of a deadly crash involving a semitruck and an SUV in Holtville, Calif., on Tuesday, March 2, 2021. (KYMA via AP)
California crash kills 13 of 25 people crammed into SUV

California crash kills 13 of 25 people crammed into SUV

FILE - In this Saturday, Feb. 20, 2021 file photo, Russian opposition leader Alexei Navalny gestures as he stands behind a grass of the cage in the Babuskinsky District Court in Moscow, Russia. Russian opposition leader Alexey Navalny was transported to a prison 100km away from Moscow. Navalny was taken to a prison in Pokrov city after Moscow city court rejected appeal against his prison sentence on Saturday, Feb. 27, 2021. (AP Photo/Alexander Zemlianichenko, File)
US sanctions Russian officials over nerve-agent attack

US sanctions Russian officials over nerve-agent attack

Neera Tanden, President Joe Biden's nominee for Director of the Office of Management and Budget (OMB), appears beofre a Senate Committee on the Budget hearing on Capitol Hill in Washington, Wednesday, Feb. 10, 2021.(AP Photo/Andrew Harnik, Pool)
Budget nominee Tanden withdraws nomination amid opposition

Budget nominee Tanden withdraws nomination amid opposition

Prime Minister Justin Trudeau holds a press conference in Ottawa on February 26, 2021. THE CANADIAN PRESS/Sean Kilpatrick
Unanimous committee report calls on Trudeau not to trigger election during pandemic

Unanimous committee report calls on Trudeau not to trigger election during pandemic

Jahmil French arrives on the red carpet at the Canadian Screen Awards in Toronto on March 11, 2018. Canadian actor Jahmil French of "Degrassi: The Next Generation" fame has died. His agent, Gabrielle Kachman, confirmed the news to The Canadian Press through a statement. THE CANADIAN PRESS/Chris Young
Canadian actor Jahmil French of ‘Degrassi: The Next Generation’ has died, says agent

Canadian actor Jahmil French of ‘Degrassi: The Next Generation’ has died, says agent

FILE - In this Feb. 6, 2005 file photo, Bunny Wailer performs at the One Love concert to celebrate Bob Marley's 60th birthday, in Kingston, Jamaica. Wailer, a reggae luminary who was the last surviving member of the legendary group The Wailers, died on Tuesday, March 2, 2021, in his native Jamaica, according to his manager. He was 73. (AP Photo/Collin Reid, File)
Bunny Wailer, reggae luminary and last Wailers member, dies

Bunny Wailer, reggae luminary and last Wailers member, dies

Eddie Murphy, left, and Arsenio Hall appear in a scene from "Coming 2 America." (Quantrell D. Colbert/Paramount Pictures via AP)
33 years later, Eddie Murphy, Arsenio Hall return to Zamunda

33 years later, Eddie Murphy, Arsenio Hall return to Zamunda

Most Read