The Bank of Canada (BOC), which surprised markets in January by cutting its rate by 25 basis points, slashed its forecast for economic growth this year and said it expects the economy to have contracted in the first half of 2015 due to lower investments in the energy sector and weaker-than-expected exports of non-energy commodities and non-commodities.
"Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target," the BOC said, attributing the fall in prices of some of its key commodity exports to slow growth in the United States and China.
The BOC, which has now cut its key rate by 50 basis points this year, projects that Canada's Gross Domestic Product will grow by just over 1.0 percent in 2015 - down from its April forecast of 1.9 percent - and then by about 2.5 percent in 2016 and in 2017 when it expects the economy to return to full capacity and inflation to reach 2 percent.
Last week the International Monetary Fund also cut its forecast for Canada's growth this year to 1.5 percent, down from its Spring forecast of 2.2 percent while the 2016 forecast was raised to 2.1 percent from a previous 2.0 percent.
Annual growth in GDP is forecast to be 1.1 percent in the second quarter of this year, a downward revision from April's forecast of 1.9 percent and then fall further to 0.7 percent in both the third and fourth quarters of this year, a downward revision from April's forecast of 1.8 percent in both quarters.
In the first quarter of this year, Canada's GDP grew by 2.06 percent, down from 2.63 percent in the fourth quarter of last year. Quarter-on-quarter, the BOC sees second quarter GDP contracting by 0.5 percent, a sharp revision of its previous forecast for expansion of 1.8 percent.
The drop in the Canadian dollar over the last 12 months will help its exporters and the BOC said recent evidence suggested a pickup in activity and rising capacity among those exporters that are most sensitive to the value of the Canadian dollar.
The Canadian dollar, known as the loonie, fell in response to the central bank's rate cut, hitting 1.295 to the U.S. dollar from yesterday's 1.276 to be 10 percent below the beginning of this year.
The lower prospects for Canadian growth has increased the downside risks to inflation, but the BOC largely maintained its forecast for inflation.
By the fourth quarter of this year, consumer price inflation is forecast at 1.4 percent, unchanged from April's forecast, and then 1.9 percent in the fourth quarter of 2016, slightly below its previous 2.0 percent forecast. By the fourth quarter of 2017 inflation is seen unchanged at 2.0 percent, meeting the BOC's target.
The Bank of Canada issued the following statement: