Loonie Halts Slide as Bank of Canada Keeps 0.5% Rate

Canada’s central bank has downgraded its economic outlook for 2016, but this was not enough incentive for it to lower the overnight rate from 0.5%.

Prices for oil and other commodities have declined further and this represents a setback for the Canadian economy.

The Canadian economy endured a shallow recession in the first half of 2015 and has been trying to avoid a so-called “double-dip” recession that would come with two quarters of negative growth.

In the days leading up to the decision, markets had priced in almost a two-thirds chance of a rate cut as oil slid relentlessly, but by Tuesday evening the balance of opinion had settled back to a almost 50-50 split as some questioned whether Governor Stephen Poloz should fire one of his last bullets now.

The rapid depreciation in the currency was seen by some as a reason for the Bank of Canada to leave rates on hold, even as the central bank marked down its economic projections. “It’s offside markets. Markets are expecting a cut at some point this year, but I think retaining policy flexibility in the face of unknown and possibly greater risks, like housing and the outlooks for the consumer, it was the smart thing to do”.

The central bank projected growth of 1.4% in 2016, significantly below its October projection of 2.0% for the year.

However, the monetary authority did say it now expected economic growth not to return to above-potential until the second quarter of 2016, although the process of shifting Canada’s growth away from resource activity “was underway”. Canadian arts organizations often negotiate contracts, especially with American talent, in USA dollars and the added cost has left them struggling, CBC reports. Furthermore, the lifting of various sanctions on Iran by the European Union and the U.S.A has helped flood the market with cheaper oil, which evidently helped further drive down the Loonie.

Inflation is evolving as expected, the Bank said, with total CPI inflation sitting near the bottom of the target range. However, the Bank has not yet incorporated the positive impact of fiscal measures expected in the next federal budget. This helped to offset some of the negative impact from yesterday’s dovish comments from Bank of Governor Carney about now not being the time for a rate cut.

Clearly pressures are mounting against the Canadian economy with oil prices already lower than the assumptions in the projections.

The plummeting “loonie”, named after the bird that appears on the Canadian dollar coin, has closely followed the drop in commodity prices, notably oil, which was until very recently the country’s main export product.

“Canada’s oil and gas sector continues to undergo a hard adjustment in response to ongoing declines in the prices for oil and natural gas”, the central bank said Wednesday.

Employment, meanwhile, remains resilient despite massive job losses in the Canadian oil patch.

The bank said household vulnerabilities have increased as a result, but that overall risks to financial stability have remained largely unchanged.