Loonie drops after Bank of Canada cuts rate

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For the second time this year, the Bank of Canada is cutting its key interest rate.

The central bank lowered its overnight rate by a quarter percentage point to .5 per cent. The bank says the economy weakened in first two quarters of 2015 which is technically considered a recession, the first time that has happened in six years.

The central bank says the economy has been shrinking in the first half of the year and the move today follows a drop in investment plans in the energy sector and weaker than expected exports. It blames a stall in global growth, a decrease in the rate of inflation and low oil prices.

Now that the key interest rate has been lowered chartered banks are reacting. TD was the first to jump, lowering their rate to 2.75 per cent, down 10 basis points instead of the full 25.

With the upcoming federal election the Conservative government has avoided the word recession and has been calling it a downturn. Bank governor Stephen Poloz was hesitant when asked today if he would call this a recession.

“Well it’s clear that in the first quarter the data showed a contraction in the economy. The monitoring that we have in the second quarter also shows a small contraction, so that means the economy had a mild contraction in the first half.”

“I’m not going to engage in the debate of what we actually call this because those terms are very finely determined. It’s not a causal or mechanical thing. It’s not until after it’s over that we can make these decisions.”

By midday the loonie fell more than a penny to 77.48 cents U.S. following the news. Economists say a cut in interest rates drive currencies lower because they make the country’s economy less attractive to foreign investors.

Additional video: Marvin Ryder of the DeGroote School of Business looks at the potential impact of the rate cut.

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