Bank of Canada cuts interest rates for last time in April

The Bank of Canada lowered its benchmark overnight lending rate by one quarter of a percentage point to 0.25 per cent at its setting on April 21st, 2009. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, declined to 0.5 per cent.

The Bank acknowledged the global economic recession had intensified since publishing its previous economic forecast in January. “In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank’s January Monetary Policy Report Update, with weaker-than-expected activity in all major economies,” said the Bank when it again lowered interest rates on April 21st.

The Bank has repeatedly lowered its policy interest rate to support economic growth. Since December 2007, the Bank has cut its overnight lending rate by a total of 4.25 per cent. Major Canadian chartered banks lowered their prime lending rate in lockstep with the Bank of Canada’ most recent interest rate cuts.

In its announcement, the Bank indicated that it was done cutting rates now that its benchmark overnight lending rate has been dropped to what it described as “the effective lower bound for that rate.” In a departure from the staus quo, it did not lower the deposit rate, which is the rate of interest paid on deposits held by financial institutions at the Bank of Canada. Leaving the deposit rate unchanged at 1/4 per cent further adds much needed liquidity into the financial system.

“The Bank was unusually explicit in its language about holding its key interest rate at its rock bottom, now that it further downgraded its inflation outlook,” said CREA Chief Economist Gregory Klump. “By saying ‘the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target,’ the Bank has removed any guesswork for projections as to how long it will be before interest rates can be expected to begin rising.”

The Bank downwardly revised its forecast for economic growth in 2009 and 2010. It also extended its forecast as to how long Canada would remain mired in an economic recession.

It also pushed the goalposts out to the third quarter of 2011 as to when it expects inflation to climb back to the two per cent midpoint of its target range between one and three per cent. The Bank targets the core rate of inflation at two per cent.

“For the second time this year, the Bank revised its economic forecast downward, making it more downbeat than the most bearish of private sector economic forecasts,” said Klump. “The Bank economic growth forecast for 2010 was also cut, but it remains rosier than the current consensus.”

The Bank’s Monetary Policy Report to be published on April 23rd will lay out the framework for additional monetary policy tools it may use to further inject liquidity into the financial system in its ongoing attack against the continuing credit crunch.

When the Bank cut interest rates on April 21st, the advertised five-year conventional mortgage rate stood at 5.45 per cent. This is down 1.54 per cent from one year earlier, and 0.34 per cent below where it stood when the Bank made its previous interest rate announcement on March 3rd.

The ongoing credit crunch has led mortgage lenders to reduce discounts on advertised mortgage interest rates, and in some cases these have been completely eliminated.

“Resale housing activity began stabilizing in the first quarter of 2009, thanks to improving affordability,” said Klump. “Lower prices and an extended stretch of low interest rates will further support sales activity this year and next. In the economic recessions of the early 1980s and 1990s, resale housing activity bottomed out before the overall economy did. As then, homebuyers this year will continue being drawn to market by improving affordability.” (CREA 21/04/2009)

Bank of Canada Cuts Interest Rates Again!

The Bank of Canada lowered its benchmark overnight lending rate by half of a percentage point to 0.5 per cent at its setting on March 3rd, 2009. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, declined to a record low of 0.75 per cent.

The Bank acknowledged the global economy has continued to deteriorate since it last lowered rates in January 2009. “The nature of the U.S. recession, with very weak auto and housing sectors, is particularly challenging for Canada,” said the Bank.

The Bank has repeatedly lowered its interest rate to support economic growth. Since December 2007, the Bank has cut its overnight lending rate by a total of four per cent.

“The Canadian economy is still widely expected to begin growing in the second half of 2009, as government spending and easier credit begins to lift economic growth,” said CREA Chief Economist Gregory Klump. “However, the Bank acknowledged that the decline in economic activity in the first half of 2009 could be sharper than forecast in January.”

The Bank reiterated its expectation that “the effects of the recent aggressive monetary and fiscal policy actions in Canada and other major economies will begin to be felt in the second half of this year and will build through 2010. Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies.”

The Bank also hinted for the first time that the recession could be longer than is currently forecast, however. Noting that there could be potential delays in stabilizing the global financial system, which it considers a precondition for the global and Canadian economic recoveries, the Bank said: “The timely implementation of ambitious plans in some major countries to address toxic assets and recapitalize financial institutions will be critical.”

As such, the forecast for economic growth in 2009 in the next Monetary Policy Report, which is slated for release in late April, will likely be revised further down. It remains to be seen whether the recovery expected by the Bank will be pushed out beyond the current forecast, in the second half of 2009.

“The Bank’s current forecast for economic growth and inflation, and likely further downward revisions, means it won’t raise interest rates anytime this year, but credit conditions have tightened, which will mute the benefit of the Bank of Canada’s recent interest rate cuts for consumers, business, and the economy,” said Klump.

When the Bank cut its overnight lending rate by 0.75 percentage points in December 2008, the prime rate fell by just 0.5 percentage points. This raised the spread to 1.75 per cent from 1.5 per cent, where it had stood for over a decade. This time, however, it appears that the Chartered Banks will cut their prime rates in step with the central bank.

Echoing previous messages about the potential for additional interest rate cuts when it next meets to set its interest rate policy, the Bank also said it “will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the two per cent inflation target over the medium term.”

The Bank also added: “Given the low level of the target for the overnight rate, the Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing.” The framework for the possible use of such measures would be outlined in the April Monetary Policy Report. In general, quantitative easing is when the Bank uses newly created money to buy assets from Chartered Banks in order to raise the money supply and stimulate the economy.

When the Bank cut interest rates on March 3rd, the advertised five-year conventional mortgage rate stood at 5.79 per cent. This is down 1.5 per cent from one year earlier, and 0.96 per cent below where it stood when the Bank made its previous interest rate announcement on January 20th, 2009.

The ongoing credit crunch has led mortgage lenders to reduce discounts on advertised mortgage interest rates, and in some cases these have been completely eliminated.

“Sales activity and prices will decline this year, as many buyers hunker down and put off buying decisions during the economic recession,” said Klump. “Housing market prospects will improve in 2010 in tandem with a rebound in economic growth.” (CREA 03/03/2009)

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."