How the Bank of Canada’s rate cut may spur growth faster than expected
This month alone, auto component manufacturer Linomar announced 1,200 new jobs in Guelph, Ont., while automaker Chrysler said it will spend $2-billion and hire new workers to retool its assembly plant in Windsor, Ont. Last month, U.S. aerospace manufacturer Pratt and Whitney said a $300-million investment from the Canadian government would help it create 1,500 jobs in Ontario and Quebec.
“The rate cut and the drop in the loonie comes at a time when manufacturing has really been humming, and it’s possible we’ll start seeing results a lot sooner than even the Bank of Canada is expecting,” Mr. Hall said in an interview.
Finance Minister Joe Oliver said Thursday, one day after the Bank of Canada’s 25-basis-point cut to the benchmark rate, that Ottawa would be able to balance the budget this year, despite the oil price shock, which led Mr. Oliver this month to delay the budget announcement from March to April.
The bank’s rate cut on Wednesday and the delay of the federal budget are the result of the sudden and sharp drop of oil prices in the past six months as global prices have fallen from more than US$100 a barrel to less than US$47. Since then, a number of Canadian energy firms have announced billion-dollar cuts to their capital expenditure programs and some have even begun to layoff staff in response.
Mr. Hall said that given the immediate impact of low oil prices, the economic damage to the energy sector has naturally taken center stage, overshadowing the manufacturing and export revival.
But the stimulative effects of the bank’s rate cut will also be felt in other areas of the economy beyond manufacturing and exports, which will start to emerge in coming months, said Peter Buchanan, chief economist at CIBC World Markets.
While Governor Stephen Poloz said his rate cut was not intended to weaken the Canadian dollar, it has already had an immediate effect that has driven the loonie to its lowest level since the 2009 recession. The loonie closed Thursday at US80.62¢.
Mr. Buchanan also said Mr. Poloz’s hints that further rate cuts could come if oil prices drop further has its own stimulative effect, potentially increasing business confidence.
“I wouldn’t undermine the psychological effects,” he said. “Two years ago, for example, Mario Draghi said he would do whatever it takes to preserve the eurozone, and that provided a huge boost of confidence for businesses and markets there for quite some time.”