Bank of Canada cuts interest rate to 0.5 percent as the loony went down to $77.54 to a US dollar
OTTAWA — The Bank of Canada finally admitted the economy fell back into a recession in the first two quarters of 2015 — the first time that has happened, “technically” at least, in six years under Conservative rule.
Prime Minister Stephen Harper earlier ruled out any stimulus spending sticking instead to a discredited balanced budget option even as prospects of hitting his economic targets fell.
But Central Bank Governor Stephen Poloz said: “Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainable to target.”
The central bank said the economy likely contracted 0.6 per cent in the first quarter of this year and by 0.5 per cent between April and June, meeting the technical definition of a recession.
The Canadian dollar plunged almost a cent after the announcement falling to 77.54 US cents.
The Bank of Canada today announced that it is lowering its overnight rate by one-quarter of one percentage point to 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.
Total CPI inflation in Canada has been around 1 per cent in recent months, reflecting year-over-year price declines for consumer energy products.
Core inflation has been close to 2 per cent, with disinflationary pressures from economic slack being offset by transitory effects of the past depreciation of the Canadian dollar and some sector-specific factors.
Setting aside these transitory effects, the Bank judges that the underlying trend in inflation is about 1.5 to 1.7 per cent.
Global growth faltered in early 2015, principally in the United States and China. Recent indicators suggest a rebound in the U.S. economy in the second half of this year, and growth is expected to be solid through the projection.
In contrast, China is slowing amid an ongoing process of rebalancing to a more sustainable growth path. This has pulled down prices of certain commodities that are important to Canada’s exports.
The Bank’s estimate of growth in Canada in 2015 has been marked down considerably from its April projection.
The downward revision reflects further downgrades of business investment plans in the energy sector, as well as weaker-than-expected exports of non-energy commodities and non-commodities.
Real GDP is now projected to have contracted modestly in the first half of the year, resulting in higher excess capacity and additional downward pressure on inflation.
The Bank expects growth to resume in the third quarter and begin to exceed potential again in the fourth quarter, led by the non-resource sectors of Canada’s economy.
This will support consumption, which will also receive a fiscal boost.
Recent evidence suggests a pickup in activity and rising capacity pressures among manufacturers, particularly those exporters that are most sensitive to movements in the Canadian dollar.
The Bank now projects Canada’s real GDP will grow by just over 1 per cent in 2015 and about 2 1/2 per cent in 2016 and 2017.
With this revised growth profile, the output gap is significantly larger than was expected in April, and closes somewhat later.
The lower outlook for Canadian growth has increased the downside risks to inflation.
While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment.
Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target. Harper, however, ruled out this option.
With growing concerns over the global economic slowdown — and its impact on growth in this country — governor Stephen Poloz cut the central bank’s trendsetting interest rate by 25 basis points to 0.50 per cent.
The previous 25-basis-point cut, in January, shocked markets — coming with little indication, and after nearly five years of dormant rate levels — though the collapse in oil prices has already started taking its toll on Canadian output.
“While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment,” Poloz and his policy team said.
As a result, policymakers pushed back their target for closing Canada’s output gap — the difference between estimated full capacity of the economy and actual output — to the first half of 2017 from the previous forecast of “around the end of 2016.”
That is the same adjusted timeframe for reaching the bank’s overall inflation target of two per cent — the midway point of policymakers’ comfort band of between one and three per cent for the annual rate of the consumer price index.
As well as, the central bank monitors a separate inflation reading, the core index, which strips out more volatile items — such as many food and energy products — to gauge underlying, longer-range trends in price movements. The target range is the same as that used for CPI data.
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“The Canadian economy continues to undergo complex adjustments that are expected to play out over the next few years . . . along two different tracks,” the bank said in its quarterly Monetary Policy Report, also released Wednesday.
With the help of a weaker Canadian dollar, policymakers are hoping trade will expand and begin to lead growth in this country.
That should also help lift exports to the U.S., helping to strengthen business confidence and investment — two elements that have been slow to recover after the 2008-09 recession — while household spending, which has led growth after the downturn, is anticipated to keep growing, the bank said.
But like Canada, the U.S. economy was weak in the first quarter of 2015 which was blamed on severe winter weather and labor disruptions at West Coast port facilities.
In its MPR, the bank said our biggest trading partner is forecast to expand by 2.3 per cent in this year, down from the previous forecast of 2.7 per cent, after growing 2.4 per cent in 2014.
Meanwhile, policymakers – following an International Monetary Fund report — also downgraded their growth outlook for the global economy, saying overall output “continues to face pervasive weak demand.”
