Bank Of Canada Running Out Of Rate-cut Ammunition

Carney cuts key interest rate to nearly zero to spur lending, but economist sees limited impact

The man responsible for keeping the economy humming pushed the panic button yesterday, reducing the Bank of Canada’s key interest rate to nearly zero in hopes of getting consumers buying again.

Governor Mark Carney cut the central bank’s trend-setting overnight rate by a half-point to a record low of 0.5 per cent. The move is intended to help revive the struggling economy by encouraging borrowing, spending and investment.

Following the Bank of Canada’s lead, the Royal Bank of Canada, Bank of Montreal, Toronto Dominion Bank, CIBC and the Bank of Nova Scotia cut their prime rates – the borrowing rate charged to their most creditworthy customers – by one-half of a percentage point to 2.5 per cent.

Amid a crippling global economic downturn, the Bank of Canada has made a series of rate cuts since December 2007 in an effort to restart the stalled economy.

Now it has little room for further cuts. Some analysts expect Carney to halve the current rate to .25 per cent, as the United States has done. But going all the way to zero would disrupt short-term lending markets for technical reasons, economists say.

“The tank is getting empty,” said Toronto economic consultant Dale Orr.

The Bank of Canada’s decision came a day after news that Canada’s economy contracted at an annual rate of 3.4 per cent in the last three months of 2008, the worst performance since 1991.

That was the latest in a stream of grim economic news from December, including a record loss of 129,000 jobs, a 47 per cent spike in bankruptcies and a trade deficit of $458 million, the first since 1976.

In a statement yesterday, Carney acknowledged he had been overly optimistic when he predicted in January the Canadian economy would start to recover in mid-2009 and turn in growth of 3.8 per cent next year.

“National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity” in the first half of 2009 than the Bank projected in January, Carney said.

“Potential delays in stabilizing the global financial system” and a larger-than-expected erosion of business and consumer confidence could delay a recovery until early 2010, he said.

“I think it’s quite obvious, even though they didn’t put a number on it, that they’ve scaled back their growth forecast for the economy this year, and likely in 2010 as well,” said BMO Capital Markets deputy chief economist Doug Porter.

While economists doubt Carney had little choice but to slash rates further, some question whether this traditional central banker’s tool for expanding the amount of money circulating in the economy is very useful in the current slump.

“If financial institutions are reluctant to lend and consumers and businesses are reluctant to borrow, then lowering interest rates may not do much to stimulate the economy,” said United Steelworkers economist Erin Weir.

Scotiabank CEO Rick Waugh said at his bank’s annual meeting in Halifax that the lower interest rate is “a step forward” for the economy but insisted the No. 1 priority is to stabilize the world financial system.

The central bank said the key overnight rate “can be expected to remain at this level or lower” until there are “clear signs” that the economy is beginning to perform closer to its normal capacity. The next rate-setting is April 21.

But, with its interest-rate ammunition all but spent, the central bank said it will be looking at other measures to ease the credit crunch that caused the Canadian economy to slow so drastically.

SOURCE: TheStar  -  Les Whittington, Ann Perry (Star Reporters)    Photo by Chris Wattie, The Canadian Press

Big Banks Cut Lending Rates

Commercial banks match Bank of Canada rate cut, lower prime to 2.5 per cent

Canadians looking for mortgages and business borrowers are getting a break today as the Bank of Canada cut its influential interest rate again by a half-point to a record low of 0.5 per cent.

Commercial banks immediately began to follow suit. RBC Royal Bank quickly announced it is trimming its prime lending rate by 50 basis points to 2.50 per cent, effective tomorrow, and the Bank of Montreal said it is lowering its variable mortgage rates, effective tomorrow. Other Canadian banks cut lending rates as well.

Bank of Canada Governor Mark Carney, who surprised analysts in January by predicting that business conditions would begin to improve in the second half of this year, admitted the economy is in worse shape than previously forecast.

His decision came a day after news that, in the last three months of 2008,Canada’s economy contracted at an annual rate of 3.4 per cent, the worst performance since 1991.

“National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity” in the first half of 2009 than the Bank projected in January, the central bank said in today’s announcement.

“Potential delays in stabilizing the global financial system” and a larger-than-expected erosion of business and consumer confidence could mean the economy will not begin to bounce back until early 2010, Carney said.

The Bank’s decision to lower its trend-setting overnight rate by 50 basis points today brings the cumulative monetary policy easing to 400 basis points since December 2007.

The positive affect of the reduced interest rates – plus the impact of economic stimulus packages by governments in Canada, the United States and elsewhere – will begin to be felt in the second half of this year and “will build through 2010,” the Bank said.

“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.”

With its key interest rate now approaching zero, the Bank said it is looking at other ways to try to boost economic activity in Canada. Carney is expected to consider purchasing assets and debt from financial institutions as a way to make credit more readily available to business and consumer borrowers.

In its Monetary Policy Report in April, the Bank will provide details of such possible measures.

SOURCE: TheStar, Les Whittington, Ottawa Bureau

NEWS FLASH! Bank Rate Hits Historic Low!

The Bank of Canada has cut a key short-term interest rate about as low as it can go in what is becoming a frantic effort to spark recovery from a recession it admits it has misjudged in terms of both duration and seriousness.

The central bank did what virtually every private sector economist advised it to do Tuesday morning, slashing the trend-setting overnight rate to 0.5 per cent, uncharted territory.But bank governor Mark Carney, who was criticized for being overly rosy in his outlook for the economy in January, now says that even at such unheard-of lows, the stimulus provided by traditional monetary policy is likely not enough.

And he said the bank now sees recovery coming later than it had projected, possibly in early 2010.

“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,” Carney wrote in a statement of his rate decision.

The central banker does not give example of specific measures, but the language implies he is considering buying back government bonds and other forms of credit from chartered banks in order to provide more liquidity in money markets.

Canada’s major banks appeared ready to play ball with Carney: shortly after the announcement, Royal Bank, Bank of Montreal and announced that they would cut their prime rates in step with the central bank.

The reference to non-traditional monetary measures confirms that Carney knows he has exhausted interest rate cuts as a means of stimulating the economy out of a deepening and increasingly stubborn recession.

There is only limited advantage in taking rates to zero – something few economists counsel. As well, the central bank has already slashed the overnight rate from 4.5 per cent 15 months ago to 0.5 per cent with limited impact.

As former Conservative cabinet minister and economist Doug Peters wrote last week: “Interest rates that count, such as interbank lending rates, mortgage lending rates, bank commercial lending rates, are all unusually high, especially considering that inflation is also very close to zero.”

The other surprise is that although Carney said recently he is unlikely to revise his controversial January forecast until the next Monetary Policy Report in late April, he does just that in the brief statement.

“The outlook for the global economy has continued to deteriorate since the bank’s January… update, with weaker-than-expected activity in major economies.”

“National accounts date for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January.”

Carney said potential delays in stabilizing the global financial system, along with low consumer confidence and larger hit on household wealth, “could mean that the output gap will not begin to close until early 2010.”

In January, Carney had forecast the economy to start growing by an annualized two per cent in the third quarter of this year, and to record an average growth of 3.8 per cent next year.

Tuesday’s statement does not officially alter the forecast, but strongly implies that both this year’s 1.2 per cent contraction will be worse and that the recession may last until next year.

On Monday, Statistics Canada reported that Canada’s gross domestic product had retreated by 3.4 per cent – more than the bank’s expectation of a 2.3 per cent fall-back – and economists were for the first time calling Carney’s prediction of a whopping 4.8 per cent contraction during this first quarter of 2009 optimistic.

Carney also forecast that inflation will likely be lower than expected this year.

SOURCE: TheStar, Julian Beltrame, THE CANADIAN PRESS

Bank Of Canada Set To Chop Rates

The Bank of Canada looks set to deliver a hefty half-point interest rate cut tomorrow that should boost the country’s dollar and bonds, but it may also signal its 15-month rate-cutting campaign is near an end.

And a report today is expected to show the economy suffered its biggest quarterly contraction since 1991 in the fourth quarter of last year. The median forecast in a Reuters poll of 16 analysts was for the economy to shrink 3.6 per cent on an annualized basis.

The rate cut is seen as a slam dunk by markets, with two-thirds of primary securities dealers forecasting a half-point easing that would take the bank’s main interest rate to a record low of 0.5 per cent.

Regardless of the size of the cut, most dealers see it as the final rate change by the bank in 2009.

“The bank in their statements and comments has not seemed overly geared to cut further and don’t seem to be drinking the same pessimistic Kool-Aid that everybody else is drinking at this point,” said Doug Porter, deputy chief economist at BMO Capital Markets, who expects a quarter-point cut.

While rate cuts generally weaken a country’s currency, some market players said in this case a cut would be viewed as a positive because it would help get the economy back on track.

“The more aggressive the bank is the better it is going to be for the Canadian dollar,” said Steve Butler, director of foreign exchange trading at Scotia Capital.

Mark Chandler, fixed income strategist at RBC Capital Markets, said that with the Bank of Canada’s key interest rate heading closer to zero, bond prices stand to gain.

“That suggests positive sentiment at the front end but limited positive sentiment without an open admission that there has been a more significant deterioration in the economic outlook.”

SOURCE: TheStar, Wire Services, March 2, 2009