Interest Rate Cuts

The Bank of Canada became the first central bank in the Group of Seven to cut interest rates in response to plummeting oil prices, saying the shock will weigh on everything from inflation to business spending.

Governor Stephen Poloz called the cut ‘insurance’ against low oil prices. Here are the bank’s top messages on how the oil rout could impact the economy

The bank cut its rate on overnight loans between commercial banks by a quarter point to 0.75%, a decision none of the 22 economists in a Bloomberg News survey predicted. The rate, which influences car loans and other lending rates across the economy, had been at 1% since September 2010, and was last cut in April 2009.

Canada, the largest exporter of oil to the U.S., is loosening monetary policy as a plunge in oil prices raises the risk of deflation globally. The European Central Bank is expected to announce tomorrow it will buy government bonds for the first time. The Bank of Japan has already boosted its asset purchases and the Bank of England said two policy makers had dropped their call for rate increases.

“It’s a shocker,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said in a telephone interview. “It is an aggressive move. It speaks volumes about where the Bank of Canada sees the economy and inflation going.”

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