“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,” the central bank said in a statement. “Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.”
Prior to the decision economists were split on what move the central bank would make, with 16 of 29 economists polled by Bloomberg forecasting the central bank would slash the overnight rate by a quarter point to 0.5 per cent.
The market was ripe with speculation building up to the announcement, with analysts suggesting a rate drop would have little economic impact because rates were already extremely low.
Brokers suggested a slight lowering of rates would have little effect, except to perhaps attract stragglers to the enticing low rate environment – assuming, of course, that lenders follow the Bank of Canada’s lead.
The Bank of Canada expects real GDP to grow by just over one per cent this year and about 2 ½ per cent in 2016.
“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,” the Bank said. “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 of Canada has lowered its overnight rate to 1/2 per cent.