News Analysis: Bank of Canada cuts lending rate to spur economy

Canada's central bank surprised markets on Wednesday with a quarter point rate cut on its key overnight lending rate, calling the move an insurance policy amid the economic threat posed by plunging oil prices.

Bank of Canada governor Stephen Poloz explained that the drop in oil prices is unambiguously negative for the Canadian economy. "Canada's income from oil exports will be reduced, and investment and employment in the energy sector are already being cut. There will be some offsets but they are both partial and of uncertain timing."

The cut brings the rate down to three-quarters of a percent after hovering at one percent since September 2010, making for cheaper variable-rate mortgages, lines of credit and other floating-rate loans.

Canada's central bank is predicting growth this year of 2.1 percent, down from its most recent projection of 2.4 percent. The culprit has been the falling price of oil -- a key component of the Canadian economy.

Oil prices have plunged to less than 50 U.S. dollars a barrel from more than 105 dollars in June last year. Poloz told reporters at a press conference on Wednesday that the new rate should be considered an insurance policy based on a prediction that oil prices would hover at 60 U.S. dollars a barrel over the next two years.

"We must remember that the world changes fast and if it changes again we have the ability to take out more insurance, or quite on the reverse, to reduce how much insurance we've taken out," Poloz said.

The rate slash caught the market, and economists, off guard. Paul Beaudry, Vancouver School of Economics professor told Xinhua on Wednesday that this was as surprising as it gets from a central bank.

Beaudry said the rate cut meant that debt in Canada was about as cheap as it had ever been, and was now more in line with other Western economies.

"In Canada, if we look historically, this is really very low rates, basically almost never been this low, just a few times. If we look internationally, we've been a bit higher at one percent than a lot of other countries, so this is putting us in line with some of the other countries, like the U.S. that has been lower than us, and Europe that has been lower than us," the professor added.

Experts said the move was also expected to reduce the value of the Canadian dollar in a bid to help boost exports for other industries.

The Canadian dollar plunged more than 1.7 cents to 80.82 U.S. cents on Wednesday afternoon trading -- its lowest level since late April 2009. Endi