BofC Poloz

Photo: Bank of Canada/Flickr

The Bank of Canada announced Wednesday it will cut the already low key interest rate of 0.75 per cent to 0.5 per cent.

The central bank cited a contracting Canadian economy in the first half of the year in its decision, though it did not explicitly call it a recession.

In a press conference, Governor Stephen Poloz pinpointed three main factors that led to the cut: Canadian oil producers said they planned further cuts for investment spending, a reduction of Canadian exports to China as its economy faltered, and weaker non-resource exports, which is somewhat tied to setbacks in US economy in the first part of the year.

The Bank of Canada is now predicting the GDP will grow by 1.1 per cent in 2015, a step down from the more optimistic projection it made in April, when it predicted real GDP growth of 1.9 per cent for the year.

Though some the big banks in the country such as TD Canada predicted the cut, others warned that lowering the overnight rate wouldn’t help the country’s stalling economy. CIBC openly questioned the effectiveness of another rate cut, while Scotiabank suggest it could “further inflame” the country’s housing market. One of the country’s biggest real estate companies, Royal LePage, even came out against a cut on Tuesday, saying lowering the rate would “over-stimulate markets such as greater Toronto and Vancouver.”

Poloz addressed these issues in the media release.

“While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment,” he said.

“Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.”

The central bank believes growth will pick up again in the third quarter of 2015, with the non-resource sectors boosting the economy further in the fourth quarter of the year.

The 0.5 per cent rate is not the lowest Canada has seen. In 2009, then-Governor Mark Carney cut the rate to 0.25 per cent in an effort to boost business and consumer spending during the recession.

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