Canada rate cut – an economy in trouble – what it means for you
January 21, 2015
Image: Central Bank Governor of Canada Stephen Poloz (CBC)
By Jake Wisnewsky
In a surprise move the Bank of Canada has today announced an interest rate cut that no one saw coming. Bank of Canada Stephen Poloz has said "The drop in oil prices is unambiguously negative for the Canadian economy," This has led to the overnight lending rate being cut by a quarter of a percentage point. He blamed oil prices further by saying that "Canada's income from oil exports will be reduced, and investment and employment in the energy sector are already being cut."
"The large decline in oil prices will weigh significantly on the Canadian economy," the Bank of Canada said in its quarterly monetary policy report.
"Given the speed and magnitude of the oil-price decline, there is substantial uncertainty around the likely level for oil prices and their impact on the economic outlook for Canada."
Canada’s currency fell dramatically against the US dollar amid criticism that it is taking too long for Canada to diversify its economy. One commentator saying that “Canada has for a while needed to diversify it's economy via a wide spectrum of innovative sectors. This way the country has a range of incoming income, interesting jobs in a wide variety of sectors, the economy can still thus grow and remain robust when one sector such as energy has downturn ect... Strategically diversifying the Cdn economy has been recommended to countless politicians via economist recommendations in Alberta to the fed level.”
What will the impacts be:
Cheaper mortgage lending rates – but not for everyone: If you’re on a fixed mortgage rate then you won’t be able to refinance to a lower rate but if you are in the market then you could be able to take advantage of the lower rate. Be careful though because there is still a thin line between an interest rate saving and higher take home debt.
For small business lines of credit could be cheaper: check with your bank to see if your interest rate on credit cards and lines of credit will go down – of not, look at cheaper alternatives elsewhere or put pressure on your bank to pass the cut on. This is an opportunity to reduce debt and lower the interest costs on current debt.
Make sure you know when to repatriate funds or hold on to them before transfer: with the dollar taking a plunge now is not a great time to buy something offshore in US dollars – the reality is it will cost more – however, in reverse if you’re repatriating then you could be in the advantage – in other words, choose your timing wisely!
About the Author: Jake is an entrehub staff writer specialising in economics and finance.
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