What is arguably the biggest news in Canada this month is that of the Bank of Canada’s surprise cut to to its interest rate – from 1.0% to 0.75%. The Governor of the Bank of Canada, Stephen Poloz, argued that such a decrease in the rate would provide a sort of insurance against the large drop in oil prices that have been seen over the past several months. However, it is important to note that this decrease in the interest rate can also threaten to shift an imbalanced economy into one that is greatly skewed toward spending – both my individual consumers and households. The overall effect of the Bank’s move could easily have the opposite effect of the intended outcomes. More specifically, the downward move of the interest rate may easily prove to increase uncertainty across the board.

For the past four-plus years, the Bank has held the rate steady at 1% – a rate that many analysts felt was too low in itself. A rate hike was widely foreseen in future announcements – either in late 2015 or into 2016. However, this has turned into a case of negative real interest rates. This is where the cost of borrowing is lower than the gradual increase in prices over time (i.e. the inflation rate). For example, yields on some government-backed bonds fell after the announcement such that they were half of Canada’s rate of inflation.

As it stands, the Bank’s upcoming interest rate moves will certainly be closely watched. Given how unsuspecting onlookers were this month, it would almost be not entirely shocking if the Bank dropped the rate even further before finally increasing it. The implications of its monetary policy will certainly have rippling effects across the country for the coming years.