Bank of Canada cuts rates again as oil's dive stalls economy

Wed Jul 15, 2015 3:23pm EDT
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By Randall Palmer and Leah Schnurr

OTTAWA (Reuters) - The Bank of Canada cut its benchmark interest rate for the second time this year on Wednesday to combat a shrinking economy, a move that drove the Canadian dollar to a six-year low.

Bank Governor Stephen Poloz had expected a recovery by now from the oil price crash that hit Canada's oil-exporting economy in the first quarter, but that projection has proved far too optimistic.

"The facts have changed, quite quickly actually, in the last two to three months," Poloz told reporters. "One of the big shocks in this outlook is the downgrade of investment intentions by the companies in the oil patch."

The 25-basis-point rate cut, which lowered the bank's benchmark rate to 0.5 percent, came the same day as U.S. Federal Reserve Chair Janet Yellen said the Fed was on track to raise rates this year. The diverging outlooks helped Canadian bonds outperform U.S. Treasuries, while the country's main stock market index jumped and the Canadian dollar sank.

Canada's central bank now expects the economy to have shrunk by an annualized 0.5 percent in the second quarter instead of growing by the 1.8 percent that Poloz had projected in April. It contracted 0.6 percent in the first quarter. Two quarters of contraction are commonly defined as a recession.

The market had been split on whether the bank would cut again. The bank had delivered a surprise 25-basis-point cut in January that was designed to counter the dive in oil prices.

The Canadian dollar tumbled to its weakest level against its U.S. counterpart - C$1.2958, or 77.17 U.S. cents - since March 2009, during the financial crisis.

"The currency is in uncharted waters here," said Derek Holt, vice president of economics at Bank of Nova Scotia, citing a risk that the Canadian dollar would weaken to as low as C$1.30 against the greenback, then dive to C$1.40.   Continued...

Bank of Canada Governor Stephen Poloz speaks during a news conference with Senior Deputy Governor Carolyn Wilkins upon the release of the Monetary Policy Report in Ottawa, Canada July 15, 2015. REUTERS/Chris Wattie