July 15, 2015 10:06 am
Updated: August 31, 2015 12:49 pm

Bank of Canada cuts key interest rate as economy falls into recession

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WATCH: The Bank of Canada lowered the rate to half a percent, triggering a drop in the dollar — the lowest it’s been since 2009, just after the last recession. Eric Sorensen explains why the bank rate keeps dropping.

The Bank of Canada cut its trend-setting interest rate to 0.5 per cent on Wednesday to help boost an economy that’s in retreat.

The central bank said it believes the economy entered a recession in the first half of the year.

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“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.

Consumer impact

The rate cut of another 25 basis points or 0.25 percentage points follows one made in January of a quarter of a point as sharply lower global oil prices were first denting growth in Canada.

A cut of 0.25 percentage points might not sound like much, but it will encourage more borrowing by businesses and consumers, the latter of which is already dealing with record debt loads.

The immediate recession seemingly outweighs consumer debt considerations, though, according to the bank’s commentary on Wednesday.

WATCH: Now that the Bank of Canada says the country is officially in recession, the bank lowered its key lending rate. As Sean O’Shea reports, Canadians with debt may see the benefit.

“While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment,” the central bank said.

“Additional monetary stimulus is required.”

The Bank of Canada’s key overnight rate directly influences private-lending interest rates for things like lines of credit and variable rate mortgages, and will generally serve to lower borrowing rates for credit — which are already near historic lows.

MORE: Interest rate cut risks sending Canada’s housing market ‘off the charts’

Enter recession

The contraction in growth through the first six months of the year stemmed from sharp declines in oil industry investment in things like new projects and employment as well as drop-off in exports as the global economy slowed, the bank said.

WATCH: Bank of Canada governor Stephen Poloz held a press conference Wednesday to explain the Bank of Canada’s decision to cut interest rates.

Odds of a rate cut grew steadily in recent weeks as trade data showed the country’s economy continuing to slow through the spring and early summer.

“The downward revision reflects further downgrades of business investment plans in the energy sector, as well as weaker-than-expected exports of non-energy commodities and non-commodities.  Real GDP is now projected to have contracted modestly in the first half of the year.”

The bank expects growth to pick up again this summer and through the balance of 2015.

The Bank of Canada’s key overnight rate directly influences private-lending interest rates for things like lines of credit and variable rate mortgages, and will generally serve to lower borrowing rates for credit — which are already near historic lows.

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