January 21, 2015 / 12:38 PM / in 3 years

Shock Bank of Canada rate cut boosts TSX, banks climb

A man walks past an old Toronto Stock Exchange (TSX) sign in Toronto, June 23, 2014. REUTERS/Mark Blinch

TORONTO (Reuters) - Canada’s main stock index rallied on Wednesday after the central bank cut its benchmark rate in a shock move, helping boost shares of energy companies as well as interest-sensitive banks and other financial issues.

The cut came after the longest period of unchanged rates since 1950. Governor Stephen Poloz said the central bank made the surprise move to provide “insurance” against risks stemming from the “oil price shock.”

Investors gave a thumbs-up to the decision, sending the benchmark equity index up 1.8 percent and driving shares of most major sectors higher.

“The Bank of Canada’s surprise cut to its overnight rate will help to buffer against the impact on employment, household incomes and mortgage serviceability in particular for Western Canada,” said Mark Allen, vice president of Canadian equities at RBC Wealth Management.

“The ensuing drop in the Canadian dollar should also provide a stimulus for the economy nationwide.”

The biggest gains were in energy shares, up 3.2 percent, which also benefited from higher oil prices on Wednesday. Suncor Energy Inc jumped 4.2 percent to C$36.40, and Canadian Natural Resources Ltd gained 4.8 percent to C$35.82.

Chris Damas, an analyst with independent firm BCMI Research, noted energy and other natural resource companies with large operations in Canada benefit from the rate cut as their costs are denominated largely in the Canadian dollar. The currency sank to a 5-1/2-year low.

“The Bank of Canada’s move is a big boost for the resource sector, which could use a helping hand here,” he said.

Financial stocks also advanced after recently being under pressure in part due to concerns about exposure to the oil and gas industry.

“This creates headwinds for the banks from an earnings perspective, but from a stock market perspective it makes the yields on bank stocks particularly attractive,” said Bruce Cooper, chief investment officer of TD Asset Management.

Royal Bank of Canada added 1.6 percent to C$76.61, and Bank of Montreal was up 1.7 percent at C$76.87.

Investors also awaited the European Central Bank’s potential move to initiate stimulus measures on Thursday, and that action is expected to serve as a major catalyst for global markets.

The Toronto Stock Exchange’s S&P/TSX composite index closed up 251.98 points, or 1.76 percent, at 14,560.42. Eight of the 10 main sectors on the index were higher.

Editing by Jeffrey Hodgson and Lisa Shumaker

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