Interest rate slashed to 1%
Bank of Canada sets historic low - January 21, 2009
By Gina Teel
Perrin Beatty, president and CEO of the Canadian Chamber of Commerce, says rate cuts are no silver bullet.
The Bank of Canada's cut of the overnight lending rate to a low of one per cent may be historic, but it's tough to say if it will give wary consumers the jolt of confidence needed to take out loans in the midst of a recession.
The bank's move Tuesday to trim the overnight rate target by half a percentage point is good and appropriate, given the tough economic times, but no silver bullet, said Perrin Beatty, president and chief executive of the Canadian Chamber of Commerce.
"Even if they were offering you money at a discount, if you didn't feel that it was a good idea to borrow, you wouldn't borrow," Beatty told the Herald.
The rate cut comes as the bank said Canada's economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis.
Canada's big banks wasted little time in passing on the full measure of the latest interest-rate relief, cutting their prime lending rates by a half-point to a record low of three per cent, and reduced some fixed and floating-rate mortgages.
Beatty said while the bank's rate cut is particularly helpful for the businesses and consumers who today have loans and need some relief, the issue is how to put stimulus in the economy in a way that starts people spending and starts to create jobs.
As traditional tools like rate cuts no longer wield the same stimulative impact they've had historically, and there's only so much more room left to trim on the overnight rate, it comes down to the issue of confidence, Beatty said.
Beatty's looking to the federal government's Jan. 27 budget--the earliest budget in Canadian history--to instil just that in consumers and business.
High on his suggestion list are liquidity and infrastructure spending.
"There are businesses today that need to get access to credit and can't get it, not for expansions but to stay in business, and we need to ensure the availability of credit for them," he said.
The bank's rate cut arrived as Canada reported its manufacturing sales in November plunged to $48.4 billion, their lowest level since December 2004.
Even Alberta's manufacturing sales fell 8.8 per cent, led by a 31.7 per cent decline in chemical product industry sales and a 15.2 per cent fall in petroleum and coal products sales, said Statistics Canada.
Given the overall dismal economic conditions, Beatty said the tone and the style of Finance Minister Jim Flaherty's upcoming budget are "every bit as important and perhaps even more so than the specific measures in it."
Earlier in January, Flaherty warned that measures he's eyeing to stimulate a recovery will also result in a"substantial deficit."
Beatty said rebuilding confidence is key, and suggested Flaherty needs to acknowledge the seriousness of the recession in Canada as well as"demonstrate within the constraints of what is possible that he's taking appropriate measures to mitigate the impact of the recession."
Dan Sumner, economist at ATB Financial, said the rate cut is just one small part of the equation when it comes to stimulating the economy.
"The Bank of Canada also has a lot of other tools, other than just the interest rate," he said.
However, Sumner noted monetary policy moves take an average of 18 months to trickle down through to the economy. Fiscal measures move much faster, he said, so with a spending pack-age in Canada likely, "that will take effect quicker as long as they can get it through the political process."
By Gina Teel
Perrin Beatty, president and CEO of the Canadian Chamber of Commerce, says rate cuts are no silver bullet.
The Bank of Canada's cut of the overnight lending rate to a low of one per cent may be historic, but it's tough to say if it will give wary consumers the jolt of confidence needed to take out loans in the midst of a recession.
The bank's move Tuesday to trim the overnight rate target by half a percentage point is good and appropriate, given the tough economic times, but no silver bullet, said Perrin Beatty, president and chief executive of the Canadian Chamber of Commerce.
"Even if they were offering you money at a discount, if you didn't feel that it was a good idea to borrow, you wouldn't borrow," Beatty told the Herald.
The rate cut comes as the bank said Canada's economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis.
Canada's big banks wasted little time in passing on the full measure of the latest interest-rate relief, cutting their prime lending rates by a half-point to a record low of three per cent, and reduced some fixed and floating-rate mortgages.
Beatty said while the bank's rate cut is particularly helpful for the businesses and consumers who today have loans and need some relief, the issue is how to put stimulus in the economy in a way that starts people spending and starts to create jobs.
As traditional tools like rate cuts no longer wield the same stimulative impact they've had historically, and there's only so much more room left to trim on the overnight rate, it comes down to the issue of confidence, Beatty said.
Beatty's looking to the federal government's Jan. 27 budget--the earliest budget in Canadian history--to instil just that in consumers and business.
High on his suggestion list are liquidity and infrastructure spending.
"There are businesses today that need to get access to credit and can't get it, not for expansions but to stay in business, and we need to ensure the availability of credit for them," he said.
The bank's rate cut arrived as Canada reported its manufacturing sales in November plunged to $48.4 billion, their lowest level since December 2004.
Even Alberta's manufacturing sales fell 8.8 per cent, led by a 31.7 per cent decline in chemical product industry sales and a 15.2 per cent fall in petroleum and coal products sales, said Statistics Canada.
Given the overall dismal economic conditions, Beatty said the tone and the style of Finance Minister Jim Flaherty's upcoming budget are "every bit as important and perhaps even more so than the specific measures in it."
Earlier in January, Flaherty warned that measures he's eyeing to stimulate a recovery will also result in a"substantial deficit."
Beatty said rebuilding confidence is key, and suggested Flaherty needs to acknowledge the seriousness of the recession in Canada as well as"demonstrate within the constraints of what is possible that he's taking appropriate measures to mitigate the impact of the recession."
Dan Sumner, economist at ATB Financial, said the rate cut is just one small part of the equation when it comes to stimulating the economy.
"The Bank of Canada also has a lot of other tools, other than just the interest rate," he said.
However, Sumner noted monetary policy moves take an average of 18 months to trickle down through to the economy. Fiscal measures move much faster, he said, so with a spending pack-age in Canada likely, "that will take effect quicker as long as they can get it through the political process."
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