OTTAWA — Bank of Canada Governor Stephen Poloz moved to offset the negative economic impact of the oil price shock by unexpectedly lowering the central bank’s overnight rate from 1 per cent to three-quarters of a per cent.
“Business investment in the energy-producing sector will decline. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth,” the central bank said in a statement accompanying the rate reduction.
“Although there is considerable uncertainty around the outlook, the Bank is projecting” the economy “will slow to about 1.5 per cent” in the first half of 2015, Poloz said in the statement. For 2015 as a whole, however, the bank predicts growth of 2.1 per cent. Previously, the bank had expected growth of 2.4 per cent this year.
He added, “The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the bank’s monetary policy response.”
The rate-reduction move, which had not been expected by economists, is meant to encourage borrowing to boost business activity to help the economy. The central bank has kept its key interest rate at 1 per cent since September 2010. The decision to lower the rate even further reflects the dire impact that Poloz foresees from the sharp decline in oil prices, which have dropped by 55 per cent since June.
Poloz said the Canadian economy had been showing signs of growth before oil prices dived.
“Outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment and employment growth,” he said.
The bank noted lower petroleum costs will have a different impact in different sections of the country.
“While the net impact of lower oil prices on the Canadian economy is negative, the effects across regions and sectors are expected to vary significantly. Lower oil prices will curtail business investment in energy-related industries, restrain housing activity in energy-intensive regions and provide some incentives for households whose incomes rely on the oil sector to build precautionary savings.
“In contrast, the manufacturing sector will benefit from stronger demand in the United States, lower shipping costs and the weaker Canadian dollar,” the bank said in its quarterly forecast. Economists have said the Ontario economy should pick up as a result of the oil-price shift while oil-producing provinces such as Alberta and Newfoundland and Labrador will see slowing growth.
“Growth in Ontario looks okay,” TD Bank economist Derek Burleton told CBC-TV. “This is an insurance move against uncertainty in the economy” by Poloz, he said.
The bank also said, “Lower oil prices will also have significant implications for public finances, notably for oil-producing provinces.”
The federal government has postponed its March budget until at least April to try to get a better idea of how the oil price shift will change its fiscal picture and how the economy will be impacted.
The Toronto stock market was sharply higher Wednesday amid the surprise rate cut by the Bank of Canada, and increased confidence about what the European Central Bank may deliver in the form of another round of economic stimulus on Thursday.
The S&P/TSX composite index jumped 228.31 points to 14,536.75, led by a sharp rise in energy stocks as oil prices advanced.
But the Canadian dollar fell 1.12 cents US to 81.48 cents US after the bank cuts its key rate.
- With a file from The Canadian Press