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Bank of Canada Cuts a Key Rate, Forecasting a Slowdown as Oil Prices Fall Canada’s Central Bank Cuts a Key Rate
(about 5 hours later)
OTTAWA — Forecasting a major economic slowdown in the face of lower oil prices, the Bank of Canada unexpectedly cut its key lending rate on Wednesday.OTTAWA — Forecasting a major economic slowdown in the face of lower oil prices, the Bank of Canada unexpectedly cut its key lending rate on Wednesday.
The central bank reduced the overnight rate to 0.75 percent, from 1 percent. It is the first rate change since September 2010.The central bank reduced the overnight rate to 0.75 percent, from 1 percent. It is the first rate change since September 2010.
The move comes as Canada deals with the consequences of lower oil prices, which are now around $48 a barrel. In recent weeks, domestic companies have announced a flurry of spending cuts and layoffs.The move comes as Canada deals with the consequences of lower oil prices, which are now around $48 a barrel. In recent weeks, domestic companies have announced a flurry of spending cuts and layoffs.
As a result, the Bank of Canada now predicts that the economy will grow at an annualized rate of 1.5 percent in the first half of the year. That is down from a previous estimate of 2.5 percent for the period.As a result, the Bank of Canada now predicts that the economy will grow at an annualized rate of 1.5 percent in the first half of the year. That is down from a previous estimate of 2.5 percent for the period.
But Stephen S. Poloz, the bank’s governor, did offer a potential bright spot.But Stephen S. Poloz, the bank’s governor, did offer a potential bright spot.
The lower value of the Canadian dollar, another byproduct of low oil prices, and the improving economy in the United States will help bolster the export-dependent manufacturing sector. After Wednesday’s announcement, the Canadian dollar hit 81 cents against the American dollar, compared to 91 cents a year ago.The lower value of the Canadian dollar, another byproduct of low oil prices, and the improving economy in the United States will help bolster the export-dependent manufacturing sector. After Wednesday’s announcement, the Canadian dollar hit 81 cents against the American dollar, compared to 91 cents a year ago.
“It’s a setback but in a story that’s coming together nicely and positively,” Mr. Poloz told a news conference, in which he said that Canada had “two economies” that were heading in opposite directions.“It’s a setback but in a story that’s coming together nicely and positively,” Mr. Poloz told a news conference, in which he said that Canada had “two economies” that were heading in opposite directions.
Canada’s fortunes are quickly shifting.Canada’s fortunes are quickly shifting.
In recent years, high oil prices and the investment they attracted turned Western Canada, particularly the province of Alberta, into the nation’s economic engine.In recent years, high oil prices and the investment they attracted turned Western Canada, particularly the province of Alberta, into the nation’s economic engine.
But many manufacturers in Ontario and Quebec suffered because of the weakness in the American economy.But many manufacturers in Ontario and Quebec suffered because of the weakness in the American economy.
Now the situation has reversed, with the oil industry taking a significant hit. On Wednesday, the Canadian Association of Petroleum Producers estimated that energy-related investment in Western Canada would reach only 46 billion Canadian dollars this year, a drop of 23 billion Canadian dollars from 2014.Now the situation has reversed, with the oil industry taking a significant hit. On Wednesday, the Canadian Association of Petroleum Producers estimated that energy-related investment in Western Canada would reach only 46 billion Canadian dollars this year, a drop of 23 billion Canadian dollars from 2014.
Last week, Joe Oliver, Canada’s finance minister, said that the turmoil in Canada’s economy would delay the presentation of his next budget until at least April. Normally federal budgets are presented to Parliament before the government’s fiscal year closes at the end of March.Last week, Joe Oliver, Canada’s finance minister, said that the turmoil in Canada’s economy would delay the presentation of his next budget until at least April. Normally federal budgets are presented to Parliament before the government’s fiscal year closes at the end of March.
The big uncertainty for Canada is just how long oil prices will stay low. The central bank is predicting that prices will stabilize at $60 a barrel later this year.The big uncertainty for Canada is just how long oil prices will stay low. The central bank is predicting that prices will stabilize at $60 a barrel later this year.
Others are less optimistic. Arlene Kish, an economist with IHS Global Insight in Toronto, said the central bank’s forecast relied too heavily on a rebound in oil prices, as well as an improvement in nonenergy exports.Others are less optimistic. Arlene Kish, an economist with IHS Global Insight in Toronto, said the central bank’s forecast relied too heavily on a rebound in oil prices, as well as an improvement in nonenergy exports.
She also did not share the bank’s assessment that employment was growing. In addition to recent announcements of oil industry cuts — the oil sands giant Suncor alone is eliminating 1,000 contract positions — Ms. Kish noted that Target’s withdrawal from Canada would soon leave at least 17,600 people out of work.She also did not share the bank’s assessment that employment was growing. In addition to recent announcements of oil industry cuts — the oil sands giant Suncor alone is eliminating 1,000 contract positions — Ms. Kish noted that Target’s withdrawal from Canada would soon leave at least 17,600 people out of work.
That combination, she wrote, “puts Canada’s household sector and energy-producing regional economies in a precarious position.”That combination, she wrote, “puts Canada’s household sector and energy-producing regional economies in a precarious position.”