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Posts tagged ‘monetary’

Bank Of Canada Cuts Interest Rate – Mar 4, 2008

UPDATE: APR 22, 2008 RATE ANNOUNCEMENT

Key rate cut by 1/2 per cent

Citing deepening woes in the U.S. economy that could further affect the Canadian and world economies, the Bank of Canada has slashed its key overnight lending rate by one-half per cent to 3 1/2 per cent. The Bank says that further economic stimulus would likely be required in the near term to keep inflation at the target of two per cent per year over the medium term. This should result in a reduction in mortgage rates by financial institutions.

On another note, Canada’s economy performed pretty much as expected through the four quarters of 2007, finishing above its capacity for that year.

The Bank of Canada Press Release:

Bank of Canada lowers overnight rate target by 1/2 percentage point to 3 1/2 per cent

OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of one percentage point to 3 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3 3/4 per cent.

Information received since the January Monetary Policy Report Update (MPRU) indicates that economic growth in Canada through the four quarters of 2007 was broadly in line with expectations. Domestic demand has remained buoyant, as rising commodity prices and high employment have continued to support income growth. Canada’s net exports weakened further in the fourth quarter, reflecting the slowing U.S. economy and the impact of the past appreciation of the Canadian dollar. Overall, the Canadian economy remained above its production capacity at year-end. Core and total CPI inflation – at 1.4 per cent and 2.2 per cent, respectively, in January – have also been consistent with the Bank’s expectations.

At the same time, there are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January. This stems from further weakening in the residential housing market, which is adversely affecting other sectors of the U.S. economy and contributing to further tightening in credit conditions. The deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy. These developments suggest that important downside risks to Canada’s economic outlook that were identified in the MPRU are materializing and, in some respects, intensifying.

The Bank now judges that the balance of risks around its January projection for inflation has clearly shifted to the downside, and, as a result, the Bank is lowering the target for the overnight rate. Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2 per cent inflation target over the medium term.

The Bank will publish a new projection for the economy and inflation, including risks to the projection, in the Monetary Policy Report on 24 April 2008.

Information note:

The Bank of Canada’s next scheduled date for announcing the overnight rate target is 22 April 2008.

See all posts about interest rates here.

Tim Ayres


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Bank Of Canada Cuts Interest Rate – Jan 22, 2008

As expected, Bank of Canada cuts the key lending rate by 1/4 per cent.

The Bank of Canada this morning announced its expected 1/4% cut in Canada’s mortgage-rate Money-money-money-monnnnnaaaaay!setting overnight lending rate. The anticipated move is made to ensure that the Canadian economy continues to grow, despite continuing struggles in the world economy dealing with the fallout of the credit crisis brought on by the housing meltdown in the United States. Borrowers in Canada can expect their lending institutions to lower their mortgage rates in the coming weeks, and variable rate mortgages should decrease as well.

There was a highly-sensationalized story reported last week that the major banks may not follow the Bank Of Canada’s monetary policy and would instead keep rates where they are, thereby increasing profitability in the wake of tightening credit availability. This is unlikely, and was denied by the major banks the following day. All it would take would be one institution to offer the lower rate, and competition being what it is, the other banks would be forced into line.

This is good news for homeowners and potential buyers. The outlook for inflation is below the 2% target rate, and is expected to stay this way until the end of 2009. The increased competition in retail sales brought on by price cuts due to the high Canadian dollar has slowed inflation to the point where it will be below 1.5% by mid year. To stimulate aggregate demand (overall spending in the economy) to return inflation to the target 2%, the Bank will likely continue to adjust downward the interest rate over the coming year.

With housing price growth expected to cool this year, and interest rates remaining stable or lowering, the erosion of housing affordability we have witnessed over the past few years should slow somewhat.

The full Bank of Canada news release can be found here.

The US Federal Reserve, in charge of setting monetary policy for our southern cousins, has meanwhile slashed rates 3/4%, the biggest cut in 23 years in an effort to ward off the threat of a U.S. recession.

Tim Ayres

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