On Wednesday, the Bank of Canada cut its benchmark interest rate for the second time this year, dropping it to a mere 0.5%. This represents its lowest level since the middle of 2009, when the rate was cut to a historical low of 0.25%. A year and half later (at the end of 2010), it was back up to 1%, where it sat undisturbed until January of this year.
The rationale behind the cut has been outlined in the Bank's latest Monetary Policy Report. (or, if you prefer, you can just watch Stephen Poloz's recent press conference here). For those of you who don't want to change websites to find out why the rate was lowered, here's the gist of it. Most importantly, the Bank has lowered its expectation of Canada's economic growth in 2015 relative to its outlook back in April, with the latest data indicating that our gross domestic product actually contracted through the first six months of this year (largely driven by cutbacks in the oil and gas industry).
The downward revision to Canada's short-term economic outlook also reflects reduced plans for business investment in the energy sector, and weaker-than-expected demand for Canada's exports. This latter trend has been driven by sluggish economic performance in the US and in China, both of which are key export markets for Canada.
While some folks (such as debt holders) are excited about this cut, others (such as those looking to buy their first home) are perhaps not so keen. Regardless, of which camp you are in, it's useful to keep in mind that the ultimate goal of this further loosening of monetary policy is to stimulate economic growth across Canada. Regardless of how it ultimately shakes down, the idea behind this cut is that a further reduction in lending rates should both encourage spending and make it easier to reduce debt loads. The lower interest rate also has an impact on our economy through international trade pathways, with our dollar becoming less expensive relative to the US dollar (and other currencies), thereby stimulating exports (a plus on the GDP ledger) and reducing our appetite for imports (a minus on the GDP ledger). There are many other factors at play, too, so it will be interesting to see what the impacts of these recent changes to the overnight lending rate will be over the coming months and years.
For those who are interested, have a look at our latest viz, which puts Wednesday's rate cut into historical perspective. It seems hard to believe that the rate reached as high as 21.6% in the early-1980s , which was the result of aggressive policies to combat high inflation that prevailed in the wake of the late-1970s energy crisis.