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Is another Rate Cut on the Way?

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New Economic Data Worse than Expected

What a difference a couple of days can make.­ Most of the analysis and commentary about ­last week’s Bank of Canada Rate Announcement can now probably be thrown out the window.­

Last Week: As expected, the Bank of Canada announced last week that it would keep its key interest rate unchanged at 0.75%, where it was set by the Bank in January (which came as a shock to most). This means that lender’s Prime Rates will also likely remain unchanged at 2.85% for the time being.

In the announcement Bank of Canada Governor, Stephen Poloz, indicated that the Bank would need time to assess the impact of low oil prices and a weaker than expected U.S. economy before any further moves, up or down, are considered. ­Following the announcement, it was still expected by most analysts that the next move would be a rate hike, but likely not until 2016.­ ­Citing elevated risks to financial stability, Mr. Poloz advised that “If these developments are sustained, their net effect will need to be assessed as more data become available in the months ahead.”

This Week: ­Some of that data has already come in. ­Statistics on the performance of the Canadian economy became available last Friday and have ­thrown much of last week’s analysis into question.­ Mr. Poloz had said that he expected the economy’s first quarter performance to be “atrocious”, with zero growth.­ It turns out he was an optimist.­ ­The data released on Friday show that the economy ­shrank by 0.6% in the first quarter, the first negative quarter in almost 4 years.

Instead of the “rates will go up but we’re not sure when” consensus of last week, the dismal economic data has put the chance of further rate cuts back on the table, with some analysts expecting a rate cut as early as the Bank’s next rate announcement on July 15.­ As the Financial Post put it: the “Bank of Canada’s July Meeting just got a lot more interesting.”­­

For the Bank of Canada’s official statement please click here­­

For further commentary please see the following links:

Bank of Canada stands pat, keeps interest rate at 0.75% - CBC­­

Top takeaways from the Bank of Canada’s decision ­- ­Financial Post

Interest rate cut back on the table after Canadian economy ­shrinks - Financial Post

Bank of Canada’s July meeting just got a lot more interesting - Financial Post­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­ ­­

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John Freeland Smith

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