There's no denying it now: Canada is in a deep recession.
The Bank of Canada cut the target interest rate to 0.50 of a percentage point, it's lowest level ever, and hinted that it might resort to measures other than interest rates to help boost the economy. The Bank of Canada also acknowledged for the first time that the economy is unlikely to recover by the end of the year. The central bank had previously made several optomistic forecasts for the fourth quarter.
The loonie fell to its lowest level in three months after the announcement to $1.2975 per US dollar.
The current rate of 0.5 per cent is about as low as the rate can go, and is essentially zero as far as economists are concerned. A zero per cent interest rate is impractical for several different technical reasons.
The key overnight interest rate, often refered to as prime, is the rate at which banks charge for overnight loans to eachother.
Mark Carney, the Bank of Canada Governor, said that it may be necessary to lower the key rate even further, although at this point other economic measures may be more effective.
"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.
Quantitative easing is the practice that the Bank of Canada uses to add to the money supply by selling securities to banks. If the government limits the number of securities available, the banks will find themselves with excess cash and expand lending.
"The outlook for the global economy has continued to deteriorate since the bank's January update, with weaker-than-expected activity in major economies," Carney said Tuesday.
"National accounts data 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."
Canada's economy lost another 129,000 in January, a number much larger than what was expected and something Carney was unaware of when he made his statement.
Statistics Canada also said that Canada's economy shrank 3.4 per cent in the fourth quarter, the country's largest decline since the recession in 1991.
Canada's five largest chartered banks in turn slashed their key lending rates by the same amount of 50 basis points. This is the second time that the banks have quickly followed the Bank of Canada's move to reduce rates after being harshly criticized for gouging after not adjusting their rates to coincide with the central bank in 2008.
However, it seems the banks aren't really dedicated to helping the economy. Customers of CIBC with secure personal line of credits received the following notice along with their most recent statement.
"Effective April 6, 2009, the annual variable interest rate will increase by one per cent and will apply to all amounts owing on PLCs." The notice went on to say, "This change is a result of global credit market conditions that have increased costs associated with lending products."
Toronto Dominion Bank and the Bank of Montreal have quietly made similar adjustments to interest rates attached to personal lines of credit. To say this is contradictory to the Bank of Canada's efforts is a drastic understatement, however the banks have kept the adjustments very quiet and away from media attention.
Finance Minister Jim Flaherty has not commented on the banks' action. However he did have some advice for Canadians, telling them "to have confidence. This too will pass. We will come out of this and there will be opportunities as we do so."
Flaherty also said that the government will work with Bank of Canada to further stimulate the economy.
"They're [The Bank of Canada] running out of room on strict monetary policy of course and there are other things they can do," Flaherty told reporters when he was asked about the possibility of unconventional monetary moves.
"We have to make sure that the steps, in terms of the additional steps, are well co-ordinated between the Bank of Canada and the government of Canada."
No comments:
Post a Comment