3 March 2009

Big banks cut lending rates

The following was reported on in the March 3rd edition of "Toronto Star".

Canadians looking for mortgages and business borrowers are getting a break today as the Bank of Canada cut its influential interest rate again by a half-point to a record low of 0.5 per cent.

Commercial banks immediately began to follow suit. RBC Royal Bank quickly announced it is trimming its prime lending rate by 50 basis points to 2.50 per cent, effective tomorrow, and the Bank of Montreal said it is lowering its variable mortgage rates, effective tomorrow. Other Canadian banks cut lending rates as well.

Bank of Canada Governor Mark Carney, who surprised analysts in January by predicting that business conditions would begin to improve in the second half of this year, admitted the economy is in worse shape than previously forecast.

His decision came a day after news that, in the last three months of 2008,Canada's economy contracted at an annual rate of 3.4 per cent, the worst performance since 1991.

"National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity" in the first half of 2009 than the Bank projected in January, the central bank said in today's announcement.

"Potential delays in stabilizing the global financial system" and a larger-than-expected erosion of business and consumer confidence could mean the economy will not begin to bounce back until early 2010, Carney said.

The Bank's decision to lower its trend-setting overnight rate by 50 basis points today brings the cumulative monetary policy easing to 400 basis points since December 2007.

The positive affect of the reduced interest rates – plus the impact of economic stimulus packages by governments in Canada, the United States and elsewhere – will begin to be felt in the second half of this year and "will build through 2010," the Bank said.

"Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies."

With its key interest rate now approaching zero, the Bank said it is looking at other ways to try to boost economic activity in Canada. Carney is expected to consider purchasing assets and debt from financial institutions as a way to make credit more readily available to business and consumer borrowers.

In its Monetary Policy Report in April, the Bank will provide details of such possible measures.