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
