The Bank of Canada surprised markets on Wednesday by its announcement that it cut its key overnight lending rate by a quarter of a percentage point, citing the economic threat posed by tumbling oil prices.
The overnight rate is down to 0.75 per cent, from one per cent where it had been since September 2010. The cut would result in lower interest rates for variable rate mortgages, lines of credit and other loans that float with prime rates, but only if banks lower their prime rates.
There were no expectations for a rate cut as no economists had made such a prediction. It was total surprise and led the Canadian dollar tumbling. USD/CAD surged after the news to as high as 1.2394, the highest since 2009.
“The drop in oil prices is unambiguously negative for the Canadian economy,” Bank of Canada governor Stephen Poloz said in a morning news conference. “Canada’s income from oil exports will be reduced, and investment and employment in the energy sector are already being cut.”