The Canadian dollar plunged more than 1 1/2 U.S. cents Wednesday after the Bank of Canada surprised markets with a quarter-percentage-point cut to its key short-term rate. The central bank also trimmed economic growth expectations for Canada because of the collapse in oil prices.
The bank had been universally expected to leave its rate unchanged at 1 per cent, where it had been since September, 2010. However, the bank dropped the rate to 0.75 per cent and said "the oil price shock increases both downside risks to the inflation profile and financial stability risks."
The loonie tumbled 1.53 cents to end at 81.07 cents (U.S.) – its lowest level since late April, 2009. It was a second day of heavy losses. A combination of falling oil prices, a weak manufacturing report and an economic downgrade from the International Monetary Fund pushed the loonie down more than 1 cent on Tuesday.
Oil prices have plunged 55 per cent since last June amid a glut of supply and have fallen about 40 per cent just since the end of November after the Organization of Petroleum Exporting Countries concluded its last meeting with a vow to leave production levels unchanged.
The Bank of Canada said it was projecting real gross domestic product growth will slow to about 1.5 per cent in the first half of this year.
It added that the negative impact of lower oil prices "will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the bank's monetary policy response."
The bank added that it expects Canada's economy to gradually strengthen in the second half of this year, with real gross domestic product growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016.
It said the economy is expected to return to full capacity around the end of 2016, a little later than was expected in October.
Crude oil prices were higher Wednesday ahead of the latest inventory figures from the U.S. Department of Energy. The March contract in New York gained $1.31 to $47.78 a barrel.
Metals were mixed with March copper up 2 cents at $2.61 pound, while February gold bullion faded 50 cents to $1,293.70 an ounce.
Meanwhile, there was increasing clarity over what the European Central Bank may deliver in the form of another round of economic stimulus on Thursday.
The Wall Street Journal reported that the board of the European Central Bank is proposing a substantial program of quantitative easing, which involves a massive round of government bond purchases. The WSJ said the bank would spend about €50-billion ($71-billion Canadian) monthly on the program. Markets had been speculating the central bank would announce a program involving spending between €500-billion and €700-billion annually.
Economic growth has been tepid and there have been worries that the region could fall prey to deflationary pressures, a situation where businesses and consumers hold off on purchases in the hope that items will just get cheaper.