The Bank of Canada became the first central bank in the Group of Seven to cut interest rates in response to plummeting oil prices, saying the shock will weigh on everything from inflation to business spending.
The bank cut its rate on overnight loans between commercial banks by a quarter point to 0.75%, a decision none of the 22 economists in a Bloomberg News survey predicted. The rate, which influences car loans and other lending rates across the economy, had been at 1% since September 2010, and was last cut in April 2009.
Canada, the largest exporter of oil to the U.S., is loosening monetary policy as a plunge in oil prices raises the risk of deflation globally. The European Central Bank is expected to announce Thursday that it will buy government bonds for the first time. The Bank of Japan has already boosted its asset purchases and the Bank of England said two policymakers had dropped their call for rate increases.
“It's a shocker,” Sal Guatieri, a senior economist at BMO Capital Markets, said in a telephone interview. “It is an aggressive move. It speaks volumes about where the Bank of Canada sees the economy and inflation going.”
Two-year bond yields plunged 29 basis points to as low as 0.55%. Stocks surged 1.9% in Toronto.
The price of North American crude oil, Canada's top export, has plunged 55% to $47.36 a barrel since June.
“The oil price shock increases both downside risks to the inflation profile and financial stability risks,” the central bank said in the statement. The cut is “intended to provide insurance against these risks” and support the adjustments needed to return the economy to full output.
The central bank also reduced its growth forecast for the first half of this year to a 1.5% annualized pace, from an October estimate of 2.4%. Inflation will slow to 0.3% in the second quarter, outside the central bank's target range of 1% to 3%, the bank projected.