Bank of Canada holds rate steady after last rate drop

March 4, 2015 | Posted by: Patrick Mulhern

Bank of Canada stands pat on key rate, cites impact of January cut

Barrie McKenna


Published Wednesday, Mar. 04 2015, 10:03 AM EST


The Bank of Canada has opted against a second consecutive interest rate cut, arguing that it is already delivering an “appropriate” amount of monetary stimulus to counter the hit from lower oil prices.

The central bank left its key overnight interest rate unchanged at 0.75 per cent Wednesday.

“At present, we judge that the current degree of monetary stimulus is still appropriate,” the bank said in statement, noting that the risks to the inflation outlook and financial stability are now “more balanced.”

The decision, which comes six weeks after the bank shocked financial markets with a quarter-percentage-point cut, appears to take another interest rate reduction off the table for now.

The bank said financial conditions have eased considerably, the Canadian dollar has fallen and economic conditions are unfolding largely as it anticipated.

“Financial conditions in Canada have eased materially since January, in response to the bank’s recent monetary policy action and to global financial developments,” the Bank of Canada said. “This easing is reflected across the yield curve and in a wide range of asset prices, including the Canadian dollar.”

The bank said the combination of a cheaper dollar and a lower interest rate would “mitigate the negative effects of the oil price shock.”

Analysts say that while the chance of another rate cut is now more remote, the Bank of Canada stands ready to react if oil starts plunging again or inflation dives lower.

“This does not fully close the door of the possibility of further rate cuts,” Bank of Montreal chief economist Douglas Porter said.

Royal Bank of Canada economist Mark Chandler said Wednesday’s statement suggests the bank may be “one and done,” satisfied that its January rate cut was enough.

As recently as last week financial markets were pricing in a 70-per-cent chance of a second rate cut.

The bank said it still expects the shock from cheaper oil will be felt mainly in the first half of this year, but added that “it may be even more front-loaded than projected in January.”

Last week, Bank of Canada Governor Stephen Poloz dispelled the notion that he would cut rates again this week, telling reporters that the bank had taken the “appropriate amount of insurance” against the damage caused by lower oil prices.

Many economists are still anticipating a second interest rate cut at the bank’s next rate announcement April 15.

The bank now appears quite comfortable, both with its current forecasts and its monetary policy stance. The statement pointed out that crude prices, now at roughly $50 (U.S.) a barrel, are close to its own assumptions and the global economy is “evolving broadly in line” with its January forecast.

And it said the 2.4-per-cent growth in Canada’s GDP in the fourth quarter was “consistent” with the bank’s own expectations.

“Data for 2014 as a whole suggest the anticipated rotation into stronger growth in non-energy exports and investment is well underway,” the statement said.


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