Bank of Canada says country in recession, cuts interest rate to lowest in history
Tue Jan 20, 9:58 AM
Julian Beltrame, The Canadian Press By Julian Beltrame, The Canadian Press
OTTAWA - The Bank of Canada is warning Canada's economy will significantly contract this year and has moved to arrest the decline by chopping its key interest rate to the lowest level ever.
The central bank cut the overnight rate by one-half point to one per cent, below the 1.12 per cent that had served as the bank's floor policy rate last seen 1958.
The decrease was in line with economists expectations, who have been calling for bold action on the parts of the central bank and the federal government in light of the quick and sharp downturn last fall following the destruction of savings in global stock markets.
Shortly after the central bank cut its rate, the big banks, led by Bank of Montreal, TD Canada Trust, Royal Bank of Canada and CIBC, also cut their prime lending rates by the same amount.
The prime determines the rates on everything from consumer loans and lines of credit to some mortgages and other loans.
Bank of Canada governor Mark Carney, who had previously declared the economy heading into recession in public comments, made it official Tuesday, revising the bank's forecast for 2009 last made in October from 0.6 per cent growth to a negative 1.2 per cent.
"The outlook for the global economy has deteriorated since the bank's December interest rate announcement, with the intensifying financial crisis spilling over into real economic activity," he wrote in the bank's one-page release.
"Heightened uncertainty is undermining business and household confidence worldwide and further eroding domestic demand."
In Canada, Carney said: "Exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth, and consumer and business confidence."
The world economy won't begin to recover until the global financial system, which has been rocked by scandal and scandalous lending practices, stabilizes, he said.
Most economists would agree that the Canadian central bank has done its part.
Since December 2007, when the initial signs of economic weakness appeared, Carney has chopped the trend-setting overnight rate by 3.5 percentage points, as well as injected $35 billion in liquidity into money markets through asset swaps.
The second shoe to drop comes next Tuesday, when the federal government introduces its 2009 budget with what officials suggest will be up to $30 billion in stimulus spending and tax cuts.
Carney said there are indications aggressive actions are yielding results, although they are faint.
"There are signs that these extraordinary measures are starting to gain traction," he wrote, "although it will take some time for financial conditions to normalize."
The negative 1.2 per cent growth projection for the economy puts the bank in line with many private forecasters, who have sharply revised down their expectations in the past two months.
But the bank would appear to be still on the sunny side of the spectrum in predicting a relatively strong recovery of 3.8 per cent in 2010. Many economists believe the slump will last longer.
Still, Carney's view is far from rosy. He said he expects inflation to remain tame - normally a good sign but under current conditions an indication consumers have stopped buying - at an average of 1.1 per cent this year.
Inflation will actually tumble into negative territory for two quarters this year as the impact of lower oil prices take hold - although the central bank does not call this occurrence deflation. Economists loosely define deflation as a prolonged period of falling prices.
As it did in December, when it cut rates by three quarters of a point, the bank hinted further interest rate cuts may be in the offing, although at one per cent, Carney is quickly running out of manoeuvring space.