The Bank of Canada is lowering its target for the overnight rate to 0.5%. The bank rate is correspondingly 0.75% and the deposit rate is 0.25%.
“They have braced themselves for poor results ahead,” writes CIBC chief economist Avery Shenfeld in a research note. The bank expects growth to resume in Q3, led by the non-resource sectors of Canada’s economy.”The first good quarter [is] not due until Q4 (at 2.5%),” he says. “That actually makes a further cut less likely, as the low bar for the next few months makes it unlikely that they will be disappointed.”
Read: How to cope with low interest rates
Shenfeld adds, “Markets hadn’t fully priced in a cut this month, but had already built in a cut for later in the year, reducing the market impacts of the move today.” He predicts the CAD will reach at least $1.30 “as we get closer to a Fed hike.” The CAD was $1.292 as of 10:27 am ET.
TD Canada Trust was the first bank to decrease its prime lending rate in response, lowering it by 10 basis points to 2.75% as of July 16, 2015.
Context for the decision
Total CPI inflation in Canada has been around 1% in recent months, reflecting year-over-year price declines for consumer energy products. Core inflation has been close to 2%, since disinflationary pressures were offset by past depreciation of the Canadian dollar and sector-specific factors. So, the Bank sees the underlying trend in inflation is about 1.5% to 1.7%.
Read: BoC to cut again: TD
Global growth faltered in early 2015, principally in the United States and China. Recent indicators suggest a rebound in the U.S. economy in the second half of this year, and growth is expected to be solid through the projection. Many economists predict the Fed’s first rate hike will occur in September.
In contrast, China is slowing. This has pulled down commodity prices that are important to Canada’s exports. Financial conditions in major economies remain very accommodative and continue to provide much-needed support to economic activity. Global growth is expected to strengthen over the second half of 2015, averaging about 3% for the year, and accelerate to around 3.5% in 2016 and 2017.
Read: Expect BoC rate cut, loonie to continue drop: CIBC
The Bank’s estimate of 2015 Canadian growth is down considerably from its April projection. That’s because of downgraded investment plans in the energy sector, as well as weaker-than-expected exports of non-energy commodities and non-commodities. 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.
Recent evidence suggests a pickup in activity and rising capacity pressures among manufacturers, particularly those exporters that are most sensitive to Canadian dollar movements. Financial conditions for households and businesses remain stimulative.
Read: Expect more surprises from BoC
The Bank now projects Canada’s real GDP will grow by just over 1% in 2015 and about 2.5% in 2016 and 2017. With this revised growth profile, the output gap is significantly larger than was expected in April, and closes later. The Bank anticipates that the economy will return to full capacity and inflation to 2% on a sustained basis in the first half of 2017.
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. Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.
This story originally appeared on our sister site, Advisor.ca.