Jan 21, 2015

By Jane Brown

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The Canadian dollar has dropped almost a full U.S. cent after the Bank of Canada surprised markets with a quarter-point cut to its key short-term rate while trimming economic growth expectations because of the collapse in oil prices.

The bank had been widely expected to leave its rate unchanged at one per cent, where it had been since September, 2010. However, the bank dropped the rate to 0.75 per cent and said that “the oil price shock increases both downside risks to the inflation profile and financial stability risks.”

The loonie is now trading at its lowest level since late April 2009. It was a second day of heavy losses after 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 one U.S. cent yesterday.

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 OPEC concluded their last meeting with a vow to leave production levels unchanged.

The Bank of Canada said it is 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.”

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