Bank of Canada cuts key lending rate as economy contracts

[OTTAWA] Canada's central bank cut its key lending rate by a quarter-point to 0.5 per cent Wednesday in a bid to stimulate an economy that fell into recession in the first half of the year.

It is the second time this year that the Bank of Canada has slashed rates to revive the economy - badly hit by lower global oil prices - after the central bank sprang a surprise on investors and households in January.

The Canadian dollar promptly slid on the news.

While Finance Minister Joe Oliver earlier this month dismissed the mere idea of a recession, the Bank of Canada left little doubt in offering a bleak assessment of an economy dependent on an energy sector in flux.

"The Bank's estimate of growth in Canada in 2015 has been marked down considerably from its April projection," the central bank said in a statement, announcing its latest rate move.

"Real GDP is now projected to have contracted modestly in the first half of the year, resulting in higher excess capacity and additional downward pressure on inflation." The bank did not specifically use the word "recession," but a recession is defined as two consecutive quarters of contraction.

"Additional monetary stimulus is required at this time to help return the economy to full capacity" and limit inflationary pressures, the bank said, justifying the rate cut.

Borrowing rates were already at a historic low in a bid to re-energise the Canadian economy.

Bank governor Stephen Poloz also did not use the word "recession," but told reporters: "There's no doubt that we have worked our way through a mild contraction." He cited three reasons behind the bank's downgraded growth estimate: lower oil prices, slowing growth in China that is cutting into Canada's commodities exports, and the faltering of its non-resource exports.

Mr Poloz also said a "setback" in the US economy - while temporary - had had an adverse effect on Canadian exports.

There have been growing fears about the state of the Canadian economy.

Earlier this month, two major banks - Nomura and Bank of America Merrill Lynch - warned that it was heading for recession.

The central bank now predicts that Canada's real GDP will grow by just over 1.0 per cent in 2015. In April, it had put growth at 1.5 per cent.

With general elections set for October, the bad economic news is also bad news for the Conservative government, in power since 2006.

Prime Minister Stephen Harper on Wednesday emphasised that the main causes of weakness in the economy had come from "beyond our border." The central bank nonetheless said it "expects growth to resume in the third quarter and begin to exceed potential again in the fourth quarter, led by the non-resource sectors of Canada's economy." "Outside the energy-producing regions, consumer confidence remains high and labour markets continue to improve," it said.

AFP