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- Aug 22, 2008
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Yesterday Canada`s central bank cut its benchmark lending rate by a quarter of a percentage point to 2.25%, forgoing the more forceful half-point cut many Bay Street economists had pushed for amid signs the dramatic steps it has already taken to battle the credit crisis are beginning to bear fruit. The clearest sign yet came yesterday when commercial banks followed the central bank`s move with a cut in their prime lending rate to 4%. "TD Canada Trust`s decision to lower its prime ... reflects [yesterday`s] Bank of Canada rate change, as well as the decrease in our cost of funds due to government actions and market forces, allowing us to pass the benefits on to customers," said Tim Hockey, president and CEO of TD Canada Trust, in a statement.
But, the Bank of Canada is not suddenly predicting blue skies ahead. Its statement was in fact downright bleak, including the bold pronouncement that the US was "already in recession" -- a word Ben Bernanke, the US Federal Reserve chairman, has himself yet to utter. The global economy also appears to be heading for a "mild recession" the bank said, as it drastically slashed its outlook for Canadian growth to 0.6% this year and next from much more optimistic forecasts of 1.0% and 2.3% respectively in July. The bank`s list of downside risks to the Canadian economy was long: weaker global growth will reduce demand for exports; sliding commodity prices, which will depress the flow of income into Canada and in turn domestic demand, while the credit crisis is bound to restrain business and housing investment. All will lead to "sluggish" growth through the first quarter of next year, though the bank stopped short of forecasting a recession for Canada. Growth is expected to eventually pick up in 2009 and the forecast is for a 3.4% burst of speed in 2010.
Derek Holt, one of the more bearish analysts on the Street, said the statement could have been written to accompany a 75-basis-point cut, let alone the 50-basis-point cut he advocated. "It was the dead-on right statement, but the wrong headline," said Holt, who says a Canadian recession is a foregone conclusion and predicts 50 basis points of cuts next time round in December. The bank highlighted three reasons for not cutting the rate further. First the recent sizeable depreciation of the Canadian dollar will provide an "important offset" to slower global growth and commodity prices. Secondly, the bank pointed out it has already meted out much assistance -- 225 basis points of rate cuts since last December, including a half-point emergency cut in co-ordination with other central banks on Oct. 8, a move it called "extraordinary." Thirdly the bank said other "extraordinary" measures major economies have announced to stabilize the financial system -- including capital injections directly into banks in some countries -- will be pivotal to resuming the flow of credit and Canada`s economy and "strong" financial system will benefit directly. The Bank of Canada itself has injected billions of dollars of liquidity into Canadian money markets, and is now accepting a wider array of collateral from institutions for borrowing. The government, meanwhile, said it will buy up to $7 billion of insured mortgages from financial institutions tomorrow, the second chunk of a $25 billion plan to help banks free up cash for lending and overcome credit market constraints. This move follows strong demand from banks in the first round, which saw institutions sell $5B in mortgage-backed securities to the government. All these measures have eased borrowing costs considerably for Canadian banks. The rate on overnight borrowing between banks has dropped to about 2.62% from a peak in early September of 4.83%.
But, the Bank of Canada is not suddenly predicting blue skies ahead. Its statement was in fact downright bleak, including the bold pronouncement that the US was "already in recession" -- a word Ben Bernanke, the US Federal Reserve chairman, has himself yet to utter. The global economy also appears to be heading for a "mild recession" the bank said, as it drastically slashed its outlook for Canadian growth to 0.6% this year and next from much more optimistic forecasts of 1.0% and 2.3% respectively in July. The bank`s list of downside risks to the Canadian economy was long: weaker global growth will reduce demand for exports; sliding commodity prices, which will depress the flow of income into Canada and in turn domestic demand, while the credit crisis is bound to restrain business and housing investment. All will lead to "sluggish" growth through the first quarter of next year, though the bank stopped short of forecasting a recession for Canada. Growth is expected to eventually pick up in 2009 and the forecast is for a 3.4% burst of speed in 2010.
Derek Holt, one of the more bearish analysts on the Street, said the statement could have been written to accompany a 75-basis-point cut, let alone the 50-basis-point cut he advocated. "It was the dead-on right statement, but the wrong headline," said Holt, who says a Canadian recession is a foregone conclusion and predicts 50 basis points of cuts next time round in December. The bank highlighted three reasons for not cutting the rate further. First the recent sizeable depreciation of the Canadian dollar will provide an "important offset" to slower global growth and commodity prices. Secondly, the bank pointed out it has already meted out much assistance -- 225 basis points of rate cuts since last December, including a half-point emergency cut in co-ordination with other central banks on Oct. 8, a move it called "extraordinary." Thirdly the bank said other "extraordinary" measures major economies have announced to stabilize the financial system -- including capital injections directly into banks in some countries -- will be pivotal to resuming the flow of credit and Canada`s economy and "strong" financial system will benefit directly. The Bank of Canada itself has injected billions of dollars of liquidity into Canadian money markets, and is now accepting a wider array of collateral from institutions for borrowing. The government, meanwhile, said it will buy up to $7 billion of insured mortgages from financial institutions tomorrow, the second chunk of a $25 billion plan to help banks free up cash for lending and overcome credit market constraints. This move follows strong demand from banks in the first round, which saw institutions sell $5B in mortgage-backed securities to the government. All these measures have eased borrowing costs considerably for Canadian banks. The rate on overnight borrowing between banks has dropped to about 2.62% from a peak in early September of 4.83%.
