Bank of Canada Cuts Rate to 0.50%

07/16/2015 9:00 am EST

Focus: CURRENCIES

Alfonso Esparaza

Senior Currency Strategist, OANDA

On Wednesday, OANDA senior currency strategist Alfonso Esparza discusses the BoC's decision to cut its key interest rate for the second time in 2015 and the bank's admission that failure to get a lift from non-energy exports is “puzzling,”  especially given a much cheaper Canadian dollar.

The Bank of Canada is cutting its key interest rate for the second time this year, citing a larger-than-expected first half contraction and a puzzling stall in non-energy exports.

The central bank lowered its benchmark overnight rate by a quarter percentage-point Wednesday to 0.5%, blaming faltering global growth, disinflation, and low prices for oil and other commodities. The Canadian dollar fell more than a cent in the wake of the decision.

The bank stopped short of characterizing the economy’s first-half stall as a recession, even a mild one. But some economists say that is exactly what Canada is facing.
The latest rate cut marks a sudden about-face by Bank of Canada Governor Stephen Poloz, who has repeatedly insisted that the economic hit from the oil price collapse would be quickly offset by surging non-oil exports, such as car parts, lumber, and machinery and equipment. He had characterized his earlier January rate cut as “insurance.”

But six months later the rebound remains elusive, in spite of a much cheaper Canadian dollar, now worth less than 80 cents (US).

The bank acknowledged in its latest forecast, also released Wednesday, that the failure to get a lift from non-energy exports is “puzzling.”

By Alfonso Esparza,Senior Currency Strategist, OANDA

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