Bank of Canada Rate Hold

The Bank of Canada announced today that it will hold its rate at 1/2 percent. Banks therefore are expected to keep their prime rates at 2.25%.

The Bank of Canada states in their announcement while the global economy is progressing positively, there is still risk going forward. In Canada, the demand for Canadian production seems more local than international, resulting in a weaker than expected GDP growth. As well inflation seems a little higher than their October Report, although still well within range.

The risks to the current direction in rates are a potentially strong global recovery that would heighten demand, causing inflation outside of projection. Offsetting that demand is a high Canadian dollar which stifles that demand from Canadian manufacturers. The Bank of Canada views current conditions as balanced and reaffirms its projection to hold rates until the end of June 2010.

Bank of Canada cuts rates to 50-year low

By Paul VieiraDecember 9, 2008

OTTAWA - The Bank of Canada surprised markets Tuesday with a deeper-than-expected 75-basis-point cut to its benchmark-lending rate, to 1.5 per cent or a 50-year low, as it warned that Canada is entering a recession and global economic conditions are deteriorating at a deeper rate than anticipated.


The last time the central bank cut its overnight rate target this deeply was on Oct. 21, 2001, to deal with the immediate economic fallout from the Sept. 11 terrorist attacks in New York and Washington.


As a result, the Bank of Canada governor Mark Carney has lowered its key lending rate by a combined 150 basis points in the span of two months. The last time the bank's key lending rate was this low was in July 1958.


In its statement, the Bank of Canada signalled the domestic and global economies have weakened more than expected. It added it would continue to "monitor carefully" economic data and financial markets to determine whether a further rate cut would be required.


"The outlook for the world economy has deteriorated significantly and the global recession will be broader and deeper than previously anticipated," the bank said. "While Canada's economy evolved largely as expected during the summer and autumn, it is now entering a recession as a result of the weakness in global economic activity. The recent declines in terms of trade, real income growth, and confidence are prompting more cautious behaviour by households and businesses."


These factors, the bank added, "imply" that core inflation will turn out to be lower than previously forecast in its October monetary policy report. In that forecast, it projected core inflation would remain below two per cent in both 2009 and 2010. The Bank of Canada sets its benchmark rate to meet a two per cent inflation target.


The gloomy outlook comes just days after Statistics Canada reported that job losses in November of just over 70,000, the biggest one-month drop in 26 years.


Andrew Pyle, wealth adviser and markets commentator at ScotiaMcLeod, said he believes the lack of a stimulus package from the federal Conservative government was a factor in the central bank's decision to cut by a deeper-than-expected 75 basis points.


"With no budget until Jan. 27, the prudent move was to cut rates more substantially as an offset, and this plan should yield results provided chartered banks and other lending institutions relax spreads enough to allow this easing to filter through."


Finance Minister Jim Flaherty said he would include fiscal stimuli in his pending Jan. 27 budget, after opposition parties threaten to take down the ruling Conservatives for failing to include a stimulus package in last month's fiscal update.


He added the move would be negative for the Canadian dollar in the short-term, but would benefit economic fundamentals in the medium term.


The Bank of Canada cited the recent drop in the Canadian dollar - to the upper-70-cent range last week - would provide an "important offset" to the effects of weaker global demand and lower commodity prices.


The bank statement suggested moves by governments to inject liquidity into strained money markets are starting to encourage credit flows, especially in Canada. However, it added it would still take some time before conditions in financial markets "normalize."


The consensus among Bay Street economists was for a 50-basis-point cut, although analysts at National Bank Financial were the exception in arguing that negative growth in the United States and rising unemployment suggested a 75-basis-point cut was in the cards.


Stephane Marion, assistant chief economist at National Bank Financial, said the Bank of Canada should be applauded, adding that interest rates are now below core inflation - the first time that's happened since 2002. "That is the necessary step to take when you have a recession."


Financial Post

Bank of Canada cuts interest rates again

The Bank of Canada lowered its benchmark overnight lending rate by one quarter of a percentage point to 2.25 per cent at its setting on October 21st. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, declined to 2.5 per cent.

The Bank also lowered its policy interest rate by half a percentage point on October 8th, as part of a coordinated cut in interest rates with other central banks. Combined with the interest rate cut on October 21st, the Bank has cut its overnight lending rate by three quarters of a percentage point since it last met to set its policy interest rate on September 3rd.

The Bank’s decision to cut interest rates aims to support Canadian economic growth. The Bank recognized the impact that the global credit crunch is having on global economic growth, indicating “the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession.”

“Slowing global economic growth continues to reduce demand and prices for energy and other commodities,“ said CREA Chief Economist Gregory Klump. “The Bank now expects core inflation to remain below its target of two per cent until the end of 2010, so it can further cut interest rates without worrying about causing inflation to spiral upward.”

To stabilize credit markets in the aftermath of the U.S. sub-prime mortgage market meltdown, the Bank has cut the overnight lending rate by 2.25 percentage points from December 2007 to October 2008.

The Bank reduced its forecast for Canadian economic growth. When announcing further interest rate cuts, it said, “The Bank expects growth to be sluggish through the first quarter of next year, then to pick up over the rest of 2009 and to accelerate to above-potential growth in 2010 supported by improving credit conditions, the lagged effects of monetary policy actions and stronger global growth. The recent sizeable depreciation of the Canadian dollar will also provide an important offset to the effects of weaker global demand and lower commodity prices. Overall, the Bank projects average annual growth in real GDP of 0.6 per cent in both 2008 and 2009, and 3.4 per cent in 2010.”

The Bank had earlier revised its forecast for economic growth downward in its July Monetary Policy Report. Remarks in its October announcement to cut interest rates suggest that it will likely cut interest rates further when it meets to set its policy interest rate on December 9th.

When the Bank cut interest rates on October 21st, the advertised conventional five-year conventional mortgage rate stood at 7.2 per cent. This is virtually unchanged from where it stood a year ago, and 0.35 per cent above where it stood when the Bank made its previous interest rate announcement on September 3rd. Competition among mortgage lenders remains stiff, but discounts off advertised mortgage interest rates remain small and in some cases have been eliminated due to the U.S. subprime mortgage meltdown and resulting global credit crunch. These continue to elevate banks’ cost of funds.

“National resale housing sales activity continues to ease from its peak last year,” said Klump. “Buyers are taking more time to shop. Unlike the U.S., Canadian homeowners are by and large under no pressure to sell, so many unsold listings are being taken off the market. New listings are coming off their peak, which is stabilizing the Canadian resale housing market.” (CREA 21/10/2008)