Carney heralds the end of easy money

July 18, 2008

18 July 2008

Carney heralds the end of easy money

The following is excerpted from the 17 July 2008 edition of “globeandmail.com”.

The higher rates banks are paying to borrow in the wake of the financial crisis are “the new normal” and a return to cheaper credit is unlikely, Bank of Canada Governor Mark Carney said Thursday.

On the eve of last summer's global credit meltdown, Canadian banks were borrowing from fellow lenders for little more than the central bank's benchmark rate. But those costs surged as global investors panicked over financial institutions' exposure to assets tied to U.S. subprime mortgages, and central banks around the world took unprecedented measures to inject liquidity into financial markets.

Royal Bank of Canada and other lenders are now borrowing money at about half the cost that they were at the start of this year. Nevertheless, banks' borrowing costs are much higher than they were before the crisis, implying mortgages and commercial and consumer loans will cost more too.

“Things have returned to what I would call the new normal,” Mr. Carney said at a press conference in Ottawa after releasing the bank's quarterly policy report. “Financial institutions will have to get used to it, and I think they are getting used to that.”

Banks' borrowing costs have implications for the economy, which the Bank of Canada estimates will grow 1 per cent this year, the weakest rate in 16 years.

To gauge the cost of credit, economists watch the gap between what banks pay to borrow money and investors' expectations of where the central bank's benchmark lending rate is headed. That shows how much of a premium private lenders have to pay to borrow – which gives a reading on how nervous lenders are about one another's solvency.

That gap, or spread, was between five and 10 basis points before the credit crunch.

Many economists said even then that a difference that small was unsustainable because it encouraged too much risky lending…

Mr. Carney effectively declared the credit crisis over in Canada last week when he ended an emergency $2-billion lending program. He said Thursday that Canada has weathered the financial storm rooted in credit markets that continues to buffet the U.S. and Europe…

…“Although credit conditions in Canada remain challenging, they are better in many respects than those in other major markets,” the central bank said in Thursday's policy report…


Topic(s): 
Canadian Economy & Politics
Information Source: 
Canadian News Channel
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