Bank of Canada’s surprise rate cut cements a weak Loonie in 2015

In what it calls “insurance” against the potentially destructive effects of the oil price collapse, the Bank of Canada (BoC) has announced a surprise quarter-percentage-point cut to its key interest rate.

In its latest monetary policy forecast, the BoC cut the overnight rate target from 1.00 percent to 0.75 percent, ensuring what it calls “a substantially weaker Canadian dollar in 2015 than in 2014”.

The decline in oil prices will be “unambiguously negative” for the Canadian economy, BoC said.

It forecasts real GDP growth to slow to 2.1 per cent in 2015 from 2.4 per cent in 2014. The BoC also expects housing activity to make ”zero contribution to real GDP growth in the next two years despite the new rate cut”. The BoC also hinted at a possible spread to other parts of the country of a real estate slump already under way in Alberta. “The extent to which the downturn already evident in Alberta will spill over into other regions remains to be seen,” the bank said. “The ramifications of the oil-price shock for household imbalances will depend importantly on the impact of the shock on income and employment.”

The bank’s new forecast calls for overall inflation to fall well below its 2-per-cent target this year, averaging just 0.6 per cent. Core inflation, which strips out volatile food and energy prices, is expected to average 1.9 per cent in 2015.

The bank said the economy won’t return to full capacity until the end of 2016, several months later than its previous estimate of the second half of next year. Among other things, the central bank pointed to significant “labour market slack.”