Fri, Jan 23, 2015 - Page 15 News List

Canada surprises with rate cut

SLOWDOWN:Canada’s move follows falling oil prices, undermining prospects for the oil-dependent economy, and ahead of the ECB’s anticipated quantitative-easing plan

Reuters, OTTAWA and FRANKFURT, Germany

The Bank of Canada joined the list of “unpredictable” central banks on Wednesday with a shock quarter point rate cut as the European Central Bank (ECB) prepared a 600 billion euro (US$695 billion) bond-buying program aimed at lifting Europe out of its economic doldrums.

The Canadian move came in response to a sharp drop in oil prices that hit the commodity-dependent economy, expected to grow by just 1.5 percent in the first half of this year compared with the central bank’s previous forecast of 2.4 percent.

The surprise move follows Denmark’s rate cut this week and a shock decision by the Swiss National Bank on Thursday last week to drop its cap on the Swiss currency against the euro and cut its rates further, likely in anticipation of the ECB’s money-printing plan, which could weaken the euro.

A eurozone source said on Wednesday that the ECB’s Executive Board, which met on Tuesday, has proposed that the bank should buy 50 billion euros in bonds per month from March.

The broader, 25-member policymaking Governing Council was scheduled to discuss the proposal yesterday before ECB President Mario Draghi gave a news conference.

Rising deflationary risks also seem to be registering at the Bank of England where two policymakers on Wednesday ditched their long-standing calls for an end to record-low interest rates.

Brazil’s was the standout central bank, with its “Copom” monetary committee raising rates as expected for the second straight meeting by 50 basis points to 12.25 percent, its highest level since August 2011, in an attempt to contain inflation and restore investor confidence.

“Taking into account the macroeconomic situation and inflation perspectives, Copom unanimously decided to raise the Selic rate,” Banco Central do Brasil said in a statement after its monthly two-day meeting.

In Asia, Bank of Korea Governor Lee Ju-yeol yesterday appeared to rule out any further rate cut in the short term, and said the central bank’s decision to slash its economic growth forecast for this year was no cause for pessimism.

After two rate cuts last year, the Bank of Korea’s benchmark rate is at a record-equalling low of 2 percent — a level not seen since 2009-2010 when Asia’s fourth-largest economy was seeking to recover from the global financial crisis.

“We cut interest rates twice last year, so the level of monetary easing is greater than before,” Lee told journalists. “Now, we have to wait and see how the effects of the cuts we took last year will pan out.”

The global economy outside of the US has turned distinctly gloomy, with Japan and Europe struggling to gain traction.

A slump in oil prices to below US$50 a barrel has added to deflationary concerns and to worries that the global economy is struggling with a widespread deficit in growth.

China and the US are the only major economies growing at a meaningful rate yet Beijing has also signaled concerns over growth with more than US$8 billion of injections of short-term loans into the banking system on Wednesday.

The move followed data on Tuesday that showed the world’s second-largest economy grew 7.4 percent last year, the weakest rate since China was hit by sanctions in 1990 after the Tiananmen Square Massacre in 1989.

China cut rates on Nov. 24 for the first time in two years due to slower factory growth and a stalling property market, although People’s Bank of China Governor Zhou Xiaochuan (周小川) on Wednesday sought to downplay economic risks.

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