Mises Wire

Bank of Canada Cuts the Interest Rate

Mises Wire Ryan McMaken

According to CBC News:

The Bank of Canada shocked markets today by cutting its key overnight lending rate by a quarter of a percentage point, citing the economic threat posed by plunging oil prices.

The drop in oil prices is unambiguously negative for the Canadian economy," Bank of Canada governor Stephen Poloz said in a morning news conference. "Canada's income from oil exports will be reduced, and investment and employment in the energy sector are already being cut.

As with the US, much of the economic growth in Canada in recent years has been driven by fracking and other types of resources extraction in the energy sector. But it's even more important to Canada's economy which is much smaller than the US economy. So, they're not kidding when they say they fear the effects of falling oil prices. Yes, falling prices are good at the consumer level, but when a sizable portion of your new employment in recent years has been based on growth in oil extraction, you have a problem when prices fall and wells must be closed or new ones put off.

Thus, the Bank of Canada scaled back its forecast for economic growth in Canada:

The central bank scaled back its forecast for the country's economic growth this year. It now sees 2015 growth of 2.1 per cent, down from 2.4 per cent.

But don't worry, since the US economy is doing so well, the Canadian economy will soon ride the American coat tails to a new prosperity. Also, a weaker dollar will propel the export sector to victory (because consumers and importers don't matter, of course). Basically the BOC says exactly what you'd expect it to say:

"The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar and the Bank [of Canada's] monetary policy response," it said.

The US economy isn't exactly known for doing well in the wake of crashing oil prices. Falling oil prices don't cause recessions, but there's obviously a correlation. If the BOC is banking on American growth to save its neck, they might want to rethink the plan.

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