The Bank of Canada has lowered their key overnight interest rate for the third quarter of 2015. Although banks haven’t responded with the same drop (TD has dropped only 10 basis points), it is the second time in 2015 the rate has dropped. Despite the bank and ruling government touting positive economic outlooks at the beginning of the year, including their forecasts for the rest of 2015, 1.1 per cent growth in GDP for all of 2015, the drop in the lending rate is indicative of a weakening Canadian economy.
The Bank of Canada cut the rate to 0.75 in January, it had been at one per cent since late 2010.
The drop is partially a result of a resource based economy being hit hard by the drop in world oil prices. The slowing of the energy sector has contributed to an overall slowing of the economy. The one saving grace is the dropping dollar. As the interest rate falls, the Canadian dollar is less attractive vs. other international currencies and therefore demand falls. This is why the dollar has depreciated on the news.
The hope by dropping the key interest rate is it will further encourage businesses to borrow money. That may be hard for some hard hit sectors of the economy, who despite cheap money, have no current market for their production. The manufacturing sector may benefit from both a weaker dollar and cheap borrowing costs.