Bank of Canada slashes interest rate to 0.25%

April 21, 2009

21 April 2009

Bank of Canada slashes interest rate to 0.25%

The following is excerpted from today's "globeandmail.com".

The Bank of Canada cut its key lending rate to the lowest possible, saying the recession is deeper and will last longer than thought.

The central bank on Tuesday shaved its benchmark overnight target a quarter-percentage point to 0.25 per cent, which is “the effective lower bound,” the central bank said in a statement Tuesday because anything deeper would disrupt short-term money markets.

The Bank of Canada said that rock-bottom interest rates are necessary to fight a recession that has turned out to be deeper and more persistent than Governor Mark Carney was expecting at the start of the year.

In January, Mr. Carney was counting on multi-billion stimulus programs pledged by governments in the Group of 20 major economies to reverse the effects of the financial crisis by the third quarter of this year. Those policies are taking longer to roll out than policy makers anticipated, a delay that's exacerbating the downturn...

The central bank now predicts that Canada's gross domestic product will shrink 3 per cent in 2009, compared with a January estimate for a 1.2 per cent contraction.

The Bank of Canada also abandoned its estimate that the economy would rebound to expand 3.8 per cent in 2010, a forecast that put policy makers out of step with far more pessimistic private economists.

Canada's rebound will be far more muted, the Bank of Canada said. The rebound will now come in the fourth quarter instead of the third quarter, and the economy will grow 2.5 per cent in 2010, the central bank said.

Mr. Carney and his chief advisers on the governing council are trying to restore confidence amid Canada's first recession since 1992. Employers have shed more than 270,000 jobs since the country fell into a recession in the fourth quarter, when factories were producing at only 75 per cent of their capacities, the lowest rate on record.

As troubling for the policy makers is an inflation rate that they said Tuesday will crater to an annual rate of negative 0.8 per cent in the third quarter.

The Bank of Canada is mandated by law to keep inflation advancing at a rate of about 2 per cent a year. That target won't be reached until the third quarter of 2011, the central bank said...

The overnight target is the rate at which the Bank of Canada encourages financial institutions to lend to each other at the end of the day when they settle their accounts.

Ultimately, commercial lenders who need either a short-term loan or a place to park excess funds at the end of the day can turn to the central bank. To encourage private institutions to balance these funds themselves, they charge 0.25 per cent more than the target on loans, and pay 0.25 per cent below the target on deposits.

Tuesday's decision makes the target and the deposit rate one and the same.

The Bank of Canada left the deposit rate unchanged at 0.25 per cent because a rate of zero would have made lending in short-term money markets unprofitable.


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