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Canada to cut key rate to zero this year

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January 20
10:27 PM 2016

In an attempt to offset the impact of lower oil price, Canada may reduce its key interest rate to zero level in 2016 and could also move to negative rates, forecasts Barclays Plc. Canadian dollar dropped by about 10 percent during the past quarter. Bank of Canada is expected to slash interest rate this week. Sluggish global financial markets are also impacting Canadian economy.

The London-based bank Barclays Plc has predicted that Bank of Canada is poised to cut key interest rate by overnight target rate of 25 basis points to 0.25 percent. Canada may reduce interest rate by 50 basis points in total this year. The Canada's central bank has updated its policy in last October and since then Canadian dollar fell 10 percent.

Bloomberg reports that the continuous fall of oil price and concerns about Chinese economy are impacting Canadian economy in more negative way. The Chinese economy growth rate below the forecasts is also adding to the concerns. Western Canadian Select, an Alberta oil-sands benchmark dropped by half since October 2015. 
 
Juan Prada and Andres Jaime Martinez stated in a research note that "in our view, risks are tilted toward further easing, which would imply negative rates. The experience of countries like Switzerland, Sweden, Denmark and the euro area has taught central banks that zero is not the lower bound."

Bank of Canada reduced interest rate by 0.5 percent in July 2015. Swaps trades are priced in 56 percent probability about the possibility of interest rate cut by Bank of Canada. Economists are expecting a cut in interest rate this week and forecast negative interest rate in the near future, as reported by The Globe And Mail.

Canada's oil dream is no more a rosy picture and the price drop is forcing the central bank to cut down interest rate. The lower oil price regime is expected to persist for foreseeable future in the wake of oversupply is impacting the global oil prices, according to IEA. Lower for longer situation has taken a toll on Canada's pitch for oil production. 

Zero Hedge says Canadian currency Loonie is also suffering from low oil prices as the country imports fresh fruits and vegetables. The weaker currency Loonie has resulted in surge in grocery prices. West Canada Select (WCS) is just a dollar above the operational cost of average price per barrel i.e. C$20 a barrel.  

Any further decline will results in a series of spillovers such as potential shutdown and halting of oil production and exports. The drop in oil price, weaker Canadian dollar Loonie and sluggish global financial markets influence Bank of Canada to lower interest rate.

JP Morgan's Daniel Hui says: "One of the few scenarios that would keep bitumen producers above marginal cost amid a further decline in global energy prices, is for CAD to depreciate substantially and at a much higher beta to oil price than has been the case in the past 18 months."

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