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Bank of Canada lowers overnight rate to 0.75 percent

Xinhua, January 22, 2015 Adjust font size:

Bank of Canada Wednesday announced that it is lowering its key overnight rate to 0.75 percent from one percent.

This decision was made in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada. The bank rate is correspondingly one percent and the deposit rate is 0.5 percent.

The sharp decline of oil price in the past six months is starting to be reflected by the CPI inflation, which temporarily boosted by sector-specific factors and the pass-through effects of the lower Canadian dollar and remained close to the two percent target in recent quarters.

The oil price shock is occurring against a backdrop of solid and more broadly-based growth in Canada. Outside the energy sector, a sequence of increased foreign demand, stronger exports, improved business confidence and investment, and employment growth is anticipated.

However, there is considerable uncertainty about the speed with which this sequence will evolve and how it will be affected by the drop in oil prices. The bank predicts that real GDP growth will slow to about 1.5 per cent and the output gap to widen in the first half of 2015.

The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank's monetary policy response.

The bank expects Canada's economy to gradually strengthen in the second half of this year, with real GDP growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016. The economy is expected to return to full capacity around the end of 2016, a little later than was expected in October.

Total CPI inflation is projected to be temporarily below the inflation-control range during 2015, moving back up to target the following year. Underlying inflation will ease in the near term but then return gradually to 2 per cent over the projection horizon.

The oil price shock increases both downside risks to the inflation profile and financial stability risks. The bank' s policy intends to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projection horizon. Endit