Wednesday, the Bank of Canada made an unexpected move: they cut interest rates to 0.75 percent, 0.25 pct lower than the previous rate of 1 percent. The central bank cited their concern for ‘lower prices potentially eroding inflation and growth within the country’ as a main factor behind the sudden move.
They also commented that the interest rate cut was ‘insurance’ against economic declines related to falling oil prices. Oil is one of Canada’s key exports.
The central bank is also the first out of the G7 nation collective to cut interest rates as a response to falling oil prices. The other six – the United States, Britain, Japan, Germany, Italy and France – have not made any cuts in response to the oil price decline at this time.
Yields for Canada’s 10-year benchmark debts declined as low as 1.365 percent, before closing at 1.43 percent. That was 0.44 percentage points under the yield for the 10-year U.S. benchmark—the largest difference between the yields since back in 2007.
Yields for 2-year Canadian debts approached 0.536 pct. Longer-dated 30-year bond yields hit 2 percent during recent trading.
The interest rate cut, much like other recent movements, was unexpected—after all, April 2009 marked the last time the central bank moved to reduce the interest rate. September 2010 marked the last time the interest rate naturally changed.
Market analysts suspect that the recent cut is ‘merely a preemptive step.’ Should oil prices remain this low, they expect the central bank to ‘make further cuts if the low prices continue to put pressure on the Canadian economy.’
Low oil prices have also put pressure on the Canadian dollar. The loonie recently fell as much as 1.8 percent, settling at C$1.2404 to the U.S. dollar by market’s close yesterday.
Friday, the currency traded at C$1.2393 to the U.S. dollar, stronger than yesterday’s C$1.2404 showing at market’s close.