UPDATE 4-Bank of Canada shocks market with rate cut, blames oil plunge

Wed Jan 21, 2015 5:12pm EST
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(New throughout with remarks on ability to cut further, market reaction)

By Randall Palmer and Leah Schnurr

OTTAWA Jan 21 (Reuters) - The Bank of Canada stunned markets by cutting interest rates on Wednesday, citing a threat to economic growth and its inflation targets from the dramatic drop in oil prices and said the bank stood ready to ease policy further if necessary.

Governor Stephen Poloz said the central bank's surprise move to stimulate the economy provides "insurance" against risks for Canada, a major oil producer, stemming from the "oil price shock". He said oil's plunge could worsen household debt burdens by driving up unemployment and cutting incomes.

"We must remember that the world changes fast and if it changes again, we have the ability to take out more insurance or on the reverse, to reduce how much insurance we've taken out," Poloz told reporters.

The bank cut its overnight benchmark to 0.75 percent from 1 percent, where it had been since September 2010, ending the longest period of unchanged rates in Canada since 1950.

The cut caught markets by surprise and sent the Canadian dollar to a nearly six-year low against the greenback. The Toronto stock market's main index surged 1.8 percent.

Thirty-five economists polled by Reuters last week had unanimously forecast the bank would hold its rate at 1 percent on Wednesday, with most anticipating a rate increase in the fourth quarter of this year.

"We didn't think things had deteriorated enough for the Bank of Canada to move as quickly as this," said Adam Cole, head of G10 FX strategy at RBC in London.   Continued...