Canada’s central bank keeps key interest rate unchanged

The Bank of Canada will announce its decision on a key interest rate later today against a backdrop of low oil prices, a tumbling Canadian dollar and grim prospects for economic growth.

“If the Bank [of Canada] decides to stand pat to observe the degree to which recent economic weakness is transitory in nature, the focus will turn to the forecasts within the monetary policy report, and a rate cut down the road remains entirely plausible”, Caranci said in an interview with the Globe and Mail. Over the past two years, the Canadian dollar has fallen 33% against the greenback, the biggest decline since the currency was unpegged from the USA dollar in 1970.

The BoC “now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016”.

The dramatic plunge in the Canadian dollar must surely be a test of optimism, and patience, for Bank of Canada Governor Stephen Poloz.

Heavyweight advancers were banks and other financial stocks as investors and mortgage holders are anxiously waiting for the Bank of Canada’s next adjustment on interest rates.

Some observers called for a rate cut because of the magnitude of the oil-price shock.

In the last week, many analysts have changed their positions and now believe Poloz will cut rates.

The last cut in interest rates to 0.5 percent took place in June. As part of the economic platform for the Canadian elections the Liberal party foresaw a need for fiscal stimulus to boost growth.

The loonie was at 68.84 cents U.S. – 0.24 of a cent above Tuesday’s close – after the central bank’s announcement at 10 a.m. ET.

Oil prices fell around 4% to hit their lowest level since 2003 in Asian deals, as the removal of sanctions over Iranian oil exports cleared the path for an all-out oil war between the Middle Eastern rivals.

“The Canadian dollar is in a tailspin”.

It’s a question Poloz has had to face a couple of times as head of the bank: whether the strong medicine of cutting the already historically low benchmark is a necessary remedy for Canada’s ailing economy. Meanwhile, financial vulnerabilities continue to edge higher, as expected. Certainly, no further rate cuts appear to be on the horizon.

When asked about the role of the Bank of Canada, Ozkardeskaya further stated that, “The BoC could only lend some support to smoothen the economic contraction and the divergent BoC/Fed monetary outlook paves the way for a further slide to the 0.65 mark”.

The November data on securities purchases is not encouraging as even back then the outflow was reaching fever pitch and the price of oil and the loonie have only gone one way in the following two months. At the very least, the Bank of Canada could hold on until after the budget is released.