Tuesday, January 20, 2009

Bank of Canada Prime Rate Reduced Again!

The Bank of Canada announced this morning another whopping rate cut, this time a 1/2 % rate reduction to an all time low of 1.0%

This time the central banks in Canada have followed suit or will follow the .5% reduction today.

Last time the Bank of Canada reduced the rate 3/4% and the banks only cut their interest rates by 1/2%, many were furious about this, myself included.

At least this time they reduced their lending rates the same amount, but they still are making billions in extra profits by not reducing the 1/4% last time. Not that I am feeling sour, just want you to know what's happening!

I hope this find you healthy and happy,

See current mortgage interest rates:

The official announcement and comments are below:
OTTAWA — The Bank of Canada has chopped its key interest rate by another half percentage point to its lowest level ever, and warned that the Canadian economy will contract by 1.2 per cent this year.

The central bank's target for the overnight lending rate now stands at 1 per cent – lower than in 1958, when the most-watched policy rate was 1.12 per cent.

“The outlook for the global economy has deteriorated since the bank's December interest rate announcement, with the intensifying financial crisis spilling over into real economic activity,” the bank said in its gloomiest statement yet.

Canada's major commercial banks, which came under fire in December when they passed on only 50 basis points of the 75-point rate cut made by the central bank, reacted swiftly to its latest move, passing along the full reduction. (There are 100 basis points in a percentage point.)

Toronto-Dominion Bank and Bank of Montreal responded by announcing they have cut their prime lending rates by 50 basis points to 3 per cent – and BMO also said it is cutting key mortgage rates by 30 to 50 basis points. Canadian Imperial Bank of Commerce, Royal Bank of Canada, Bank of Nova Scotia and Laurentian Bank of Canada said later in the morning that they, too, have cut their prime rate to 3 per cent from 3.5 per cent.

Last fall, the central bank had counted on the Canadian economy growing by 0.6 per cent this year. But since then, it has recognized that Canada is in recession, and now says the economy will shrink by 1.2 per cent in 2009, as the country succumbs to sagging global demand, lower energy prices and a collapse of confidence around the world.

“Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence,” the bank said.

The Canadian dollar fell sharply immediately following the bank's announcement, dropping as far as 78.76 cents U.S. As midday (ET) approached, however, it had edged up to 79.32 cents, down by 0.38 of a cent from Monday's official close.

Since slack is building up in Canada's economy and housing prices are coming down modestly, inflationary pressure should also ease, the bank explained.

Total inflation will likely fall below zero for much of 2009 because of lower energy prices. And even core inflation, which excludes energy and other volatile items, will drop to about 1.1 per cent at the end of this year, the bank said.

But the central bank sees a remarkably strong recovery in 2010, with the Canadian economy growing 3.8 per cent next year and inflation edging back up to hit the bank's two per cent target in early 2011.

In order for the recovery to take hold, the global financial system has to stabilize, the bank said, but added that that process has begun, “There are signs that these extraordinary measures [by governments and central banks] are starting to gain traction, although it will take some time for financial conditions to normalize,” the statement said.

Plus, the global economy should start to benefit from “considerable” monetary and fiscal stimulus, the bank said.

Canada's recovery should also be bolstered by the past depreciation of the Canadian dollar, the statement added.

The bank did not promise any further interest rates to follow. Instead, the bank pointed out that it had already reduced its key rate by three and a half percentage points since December 2007, and added that it would keep an eye on how the economy and markets develop, and decide accordingly what it should do with rates.

“Guided by Canada's inflation-targeting framework, the bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required,” it said.

Economists have warned that central banks need to be prepared to quickly reverse their aggressive interest rate cuts of the past year as soon as they see signs of recovery. Otherwise, there is so much monetary and fiscal stimulus floating around that today's disinflation could easily turn into an inflation problem when economies begin to grow again.

Economists have also been on the lookout for alternative forms of boosting the economy, aside from interest rates, with the U.S. Federal Reserve's key rate already hovering around zero, and the Bank of Canada at its lowest level too.

While Bank of Canada Governor Mark Carney has said previously that he is examining his options, there was no suggestion in Tuesday's statement that any non-conventional measure is imminent.

Still, with the federal budget just a week away, the government is expected to introduce several easing mechanisms, as well as a huge stimulus program to help ease the bite of the recession.

The Bank of Canada will issue a more complete economic outlook on Thursday.

Douglas Porter, deputy chief economist at BMO Nesbitt Burns said the commercial banks were able to lower their prime rates in tandem with the central bank cut because their own funding costs have edged down, and retail demand for the banks' own commercial paper is on the rise.

Mr. Porter also said in a note to clients that the central bank's “actions and words were almost exactly in line with expectations of the forecasting community,” while its near-term economic forecasts “closely mirror” BMO's.

“If global financial markets continue to stagger in the coming weeks, the [central bank] still has the room and the willingness to cut further as the need arises,” he added.

However, Erin Weir, economist for the Canadian arm of the United Steelworkers union, argued that the Bank of Canada did not cut rates enough.

“The [bank] should have matched the American Federal Reserve and cut to zero,” Mr. Weir said in a commentary – either to avert deflation or to stimulate the economy.

He added that the bank's “timidity reinforces the need for a substantial stimulus package in next week's federal budget.”

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