Interest Rate Shocker

Well, well, well. The Bank of Canada did something shocking this morning: they cut interest rates!

The price of oil will certainly prove to be negative for growth and underlying inflation in Canada despite the cheap price of gas at the pumps. It seems that this move, unexpected by the market, is being introduced in an attempt to protect highly indebted Canadian households.

The banks will probably move to lower their rates on mortgages and other loans although the last thing most households should be doing right now is adding on more debt.

I can see the Canadian dollar falling to 80 cents or lower. Overall inflation may drop under 75 bps, dangerously close to disinflation. 2015 will be a challenging year for Canada from an economic perspective:

The oil price shock increases both downside risks to the inflation profile and financial stability risks. The Bank”™s policy action is intended to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projection horizon.

That projected horizon to full capacity is now the end of 2016. The Bank of Canada press release can be found here.

I guess lower interest rates are here for a bit longer. But really, building out the economy on real estate speculation, consumer debt and resource extraction is risky.

Here’s hoping the Bank of Canada can right the ship.