Globe and Mail - Bank of Canada trims key rates in face of falling inflation
Globe and Mail Update
HEATHER SCOFFIELD
October 21, 2008 at 9:16 AM EDT
OTTAWA — The Bank of Canada Tuesday cut its key interest rate by a small quarter of a percentage point, attempting to give the Canadian economy a boost in the face of what the central bank has labeled a global recession.
Canada's economy will be able to eke out a tiny bit of growth this year and next, but “the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession,” the bank said in an unusually lengthy and gloomy statement accompanying its rate decision.
The central bank's key rate now stands at 2.25 per cent – significantly lower than just 10 months ago, when it stood at 4.5 per cent.
Canada's economy is now expected to grow just 0.6 per cent in both 2008 and 2009, the bank said. The new forecast is probably the biggest downward revision the central bank has ever made – a dramatic and quick turnaround from the July forecast of 1.0 per cent growth in 2008 and 2.3 per cent in 2009.
“The outlook for growth and inflation in Canada is now more uncertain than usual,” the central bank explained.
While Tuesday's rate cut is not as big as many economists had expected or hoped for, the bank indicated it stands ready to cut interest rates again soon.
“Some further monetary stimulus will likely be required to achieve the 2 per cent inflation target over the medium term,” the statement said.
But it warned: “The evolution of the financial crisis, its impact on the global economy and the timing of the effects of the various extraordinary measures being taken to address it pose significant risks to the projection on both the upside and the downside.”
Economists, including those forming a shadow monetary policy committee at the C.D. Howe Institute, had urged the Bank of Canada to slash by a larger half-percentage-point to help Canada deal with the financial crisis and the deepening recession in the United States. Many economists now predict Canada is in the midst of a shallow recession that will lead to government deficits in the years ahead.
But the central bank pointed out that it had just cut by a half percentage point two weeks ago, in concert with other major central banks around the world.
That cut, together with Tuesday's quarter-point cut, “provide timely and significant support to the Canadian economy,” the bank said.
Plus, the Bank of Canada said it has undertaken a host of other measures designed to stabilize the financial system.
Canada is being whacked by three “profound” forces at the same time, the bank pointed out:
• The global financial crisis has intensified, and as major global banks continue to hunker down, the crisis will further restrain growth “for some time,” the bank said.
• The global economy is heading into a recession, commonly defined as annual growth of less than three per cent, and the United States is contracting.
• Commodity prices have declined sharply, stemming the flow of money into Canada, and dampening domestic demand here.
As a result, Canada's exports will continue to suffer, consumers will pull back, and tight credit conditions will restrain business and housing investment, the bank warned.
However, the “sizeable depreciation” of the Canadian dollar should help offset the pain caused by weak global demand and lower commodity prices.
The bank's forecast sees a recovery by 2010, with growth reaching 3.4 per cent in Canada. However, the bank's forecast always automatically projects the economy to be in balance within two years.
As for rising prices, they are no longer a problem. Inflationary pressure is expected to back off significantly, as global energy prices slide lower. Core inflation, which excludes energy and other volatile items, won't even reach two per cent until the end of 2010, the bank said.
Total inflation – which had soared earlier this year and caused much consternation among central bankers around the world – is peaking now in Canada. It will likely fall below 1 per cent next year, and return to the bank's 2 per cent target by the end of 2010, the Bank of Canada said.
Tuesday's rate decision is the first time the central bank's new governor, Mark Carney, has cut rates by just a quarter of a percentage point since he took over the helm from David Dodge in February.
Mr. Carney cut rates by a half percentage point both in March and April this year, and then went on hold until Oct. 8, when he cut by a half percentage point in a coordinated move with other central banks.
In order for Canadians to get any benefit from lower central bank rates, the commercial banks need to match the rate cut with a similar cut to their own prime rates. The commercial banks have been trying to resist such prime rate cuts, since lowering rates hurts their precarious profit margins.
HEATHER SCOFFIELD
October 21, 2008 at 9:16 AM EDT
OTTAWA — The Bank of Canada Tuesday cut its key interest rate by a small quarter of a percentage point, attempting to give the Canadian economy a boost in the face of what the central bank has labeled a global recession.
Canada's economy will be able to eke out a tiny bit of growth this year and next, but “the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession,” the bank said in an unusually lengthy and gloomy statement accompanying its rate decision.
The central bank's key rate now stands at 2.25 per cent – significantly lower than just 10 months ago, when it stood at 4.5 per cent.
Canada's economy is now expected to grow just 0.6 per cent in both 2008 and 2009, the bank said. The new forecast is probably the biggest downward revision the central bank has ever made – a dramatic and quick turnaround from the July forecast of 1.0 per cent growth in 2008 and 2.3 per cent in 2009.
“The outlook for growth and inflation in Canada is now more uncertain than usual,” the central bank explained.
While Tuesday's rate cut is not as big as many economists had expected or hoped for, the bank indicated it stands ready to cut interest rates again soon.
“Some further monetary stimulus will likely be required to achieve the 2 per cent inflation target over the medium term,” the statement said.
But it warned: “The evolution of the financial crisis, its impact on the global economy and the timing of the effects of the various extraordinary measures being taken to address it pose significant risks to the projection on both the upside and the downside.”
Economists, including those forming a shadow monetary policy committee at the C.D. Howe Institute, had urged the Bank of Canada to slash by a larger half-percentage-point to help Canada deal with the financial crisis and the deepening recession in the United States. Many economists now predict Canada is in the midst of a shallow recession that will lead to government deficits in the years ahead.
But the central bank pointed out that it had just cut by a half percentage point two weeks ago, in concert with other major central banks around the world.
That cut, together with Tuesday's quarter-point cut, “provide timely and significant support to the Canadian economy,” the bank said.
Plus, the Bank of Canada said it has undertaken a host of other measures designed to stabilize the financial system.
Canada is being whacked by three “profound” forces at the same time, the bank pointed out:
• The global financial crisis has intensified, and as major global banks continue to hunker down, the crisis will further restrain growth “for some time,” the bank said.
• The global economy is heading into a recession, commonly defined as annual growth of less than three per cent, and the United States is contracting.
• Commodity prices have declined sharply, stemming the flow of money into Canada, and dampening domestic demand here.
As a result, Canada's exports will continue to suffer, consumers will pull back, and tight credit conditions will restrain business and housing investment, the bank warned.
However, the “sizeable depreciation” of the Canadian dollar should help offset the pain caused by weak global demand and lower commodity prices.
The bank's forecast sees a recovery by 2010, with growth reaching 3.4 per cent in Canada. However, the bank's forecast always automatically projects the economy to be in balance within two years.
As for rising prices, they are no longer a problem. Inflationary pressure is expected to back off significantly, as global energy prices slide lower. Core inflation, which excludes energy and other volatile items, won't even reach two per cent until the end of 2010, the bank said.
Total inflation – which had soared earlier this year and caused much consternation among central bankers around the world – is peaking now in Canada. It will likely fall below 1 per cent next year, and return to the bank's 2 per cent target by the end of 2010, the Bank of Canada said.
Tuesday's rate decision is the first time the central bank's new governor, Mark Carney, has cut rates by just a quarter of a percentage point since he took over the helm from David Dodge in February.
Mr. Carney cut rates by a half percentage point both in March and April this year, and then went on hold until Oct. 8, when he cut by a half percentage point in a coordinated move with other central banks.
In order for Canadians to get any benefit from lower central bank rates, the commercial banks need to match the rate cut with a similar cut to their own prime rates. The commercial banks have been trying to resist such prime rate cuts, since lowering rates hurts their precarious profit margins.