Canadian dollar plunges as Bank of Canada stands pat at 0.5%

 CBC News Posted: Oct 21, 2015 10:05 AM

Bank of Canada opts to hold rate steady after cutting twice this year to stimulate the economy

The Bank of Canada is keeping its benchmark interest rate right where it currently sits, at 0.5 per cent.

The bank, led by Stephen Poloz, meets every six weeks to decide on monetary policy and has cut its trend-setting interest rate twice this year in a bid to stimulate Canada’s economy.

The central bank’s interest rate influences the rates that borrowers and savers pay and earn for things like mortgages and savings accounts.


The consensus view among 27 economists polled by Bloomberg ahead of the bank’s decision was for the bank to do exactly what it did — nothing.

In explaining its reasoning, the bank said it kept its rate as is based on the impact of previous changes.

“Canada’s economy has rebounded, as projected in July,” the bank said in a statement. The low Canadian dollar has helped most Canadian industries outside the resources sector, and household spending is expected to increase at what the bank calls a “moderate pace” moving forward.

Future outlook downgraded

That’s good enough news that the bank thinks there’s no need for any more monetary stimulus quite yet. But the future isn’t looking entirely rosy, either, because the bank downgraded its economic expectations for the rest of 2015 and the two years beyond that.

The bank now thinks the economy will expand by one per cent in 2015, by two per cent next year and up to 2.5 per cent growth in 2017.

The bank’s next meeting to decide on interest rates is scheduled for Dec. 2. Economists don’t think the central bank is likely to move rates one way or the other at that meeting, either.

But given the gloomy forecast, more stimulus down the line is certainly possible, some say. “We still anticipate that further weakness in energy-related business investment, combined with an underwhelming performance from non-energy exports and possibly even some signs of weakness in housing, will eventually prompt the Bank to lower rates to 0.25 per cent early next year,” said David Madani at Capital Economics.

Indeed, the bank’s lowered outlook for the future was a much bigger story than its decision to sit on the sidelines on rate changes for now.

The Canadian dollar plunged as soon as the report came out, losing 0.8 of a cent to 76.25 cents US as investors digested the reduced growth picture, and the likelihood that another rate cut is possible. By the end of the day it was down .94 of a cent at 76.11 cents US.

All things being equal, rate cuts are a negative for a currency, as that makes investments denominated in that currency less attractive as investments.