(Bloomberg) — The Bank of Canada reduced its benchmark interest rate for a second time this year as the damage from lower oil prices shrank the economy in the first half and leaves a full recovery almost two years away.
Gross domestic product probably “contracted modestly” in the first half, policy makers said, without calling it a recession, which is typically defined as two straight quarters of negative growth. Output will recover this quarter as non- energy exports rebound from a decline the bank called “puzzling.’
The central bank lowered the benchmark rate on overnight loans between commercial banks to 0.5 percent from 0.75 percent, where it had been since a cut in January. The first-half contraction led to a “marked increase in excess capacity,” the bank said.
“The lower outlook for Canadian growth has increased the downside risks to inflation,” policy makers led by Governor Stephen Poloz said in a statement Wednesday. “While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment.” Poloz is scheduled to hold press conference at 11:15 a.m.
Policy makers at the Ottawa-based bank said output probably shrank at a 0.5 percent annualized pace in the second quarter, compared with an April prediction of a 1.8 percent expansion. The economy registered a 0.6 percent contraction between January and March.
Historically low interest rates have already pushed consumer debt-loads and home prices to record highs, while failing to trigger lasting investment and export gains.
Fifteen of 29 economists in a Bloomberg News survey predicted the reduction, with the rest calling for no change.
The economy won’t return to its full capacity to keep inflation at 2 percent “on a sustained basis” until the first half of 2017, the bank said Wednesday, later than the April forecast of around the end of 2016. The “underlying trend” of inflation is between 1.5 percent and 1.7 percent the bank said, down from the prior estimate of 1.6 percent to 1.8 percent.
Oil and gas investment will drop by almost 40 percent this year, even with benchmark crude prices up by about $10 to $15 a barrel from April, the bank said. Crude oil is Canada’s top export and lower prices are prompting producers from Suncor Energy Inc. to Imperial Oil Ltd. to accelerate a shift to smaller projects.