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As widely expected, the Bank of Canada lowered its
benchmark overnight lending rate by a half of a percentage point to one
per cent at its setting on January 20th, 2009. The trend-setting Bank
rate, which is set 0.25 percentage points above the overnight lending
rate, declined to 1.25 per cent.
The Bank acknowledged the global economy has
deteriorated further since it last lowered rates in December 2008, when
it announced Canada had entered a recession. “Major advanced economies,
including Canada's, are now in recession and emerging-market economies
are increasingly affected,” said the Bank when it again lowered interest
rates on January 20th.
The Bank has repeatedly lowered its policy interest
rate to support economic growth. Since December 2007, the Bank has cut
its overnight lending rate by a total of 3.5 per cent.
“The Canadian economy is widely expected to begin
growing in the second half of 2009, as government spending and easier
credit begins to lift economic growth,” said CREA Chief Economist
Gregory Klump. “Business and consumer confidence are unlikely to improve
much until such evidence appears.”
The Bank downwardly revised its forecast for economic
growth in 2009, but revised it upward for 2010. It also pushed the
goalposts out to the middle of 2011 as to when it expects inflation to
climb back to the two per cent midpoint of its target range between one
and three per cent. The Bank targets the core rate of inflation at two
per cent. The rate has stayed below the target level since October 2007.
“The Bank’s revised forecast for economic growth and
inflation means it won’t raise interest rates anytime this year, but
credit conditions have tightened, which will mute the benefit of the
Bank of Canada’s recent interest rate cuts for consumers, business, and
the economy,” said Klump.
Echoing previous messages about for the potential for
additional interest rate cuts when it next meets in March to set its
policy interest rates, the Bank also said it “will continue to monitor
carefully economic and financial developments in judging to what extent
further monetary stimulus will be required to achieve the two per cent
inflation target over the medium term.”
When the Bank cut interest rates on January 20th, the
advertised five-year conventional mortgage rate stood at 6.75 per cent.
This is down 0.74 per cent from one year earlier, and 0.2 per cent below
where it stood when the Bank made its previous interest rate
announcement on December 9th, 2008.
The ongoing credit crunch has led mortgage lenders to
reduce discounts on advertised mortgage interest rates, and in some
cases these have been completely eliminated.
“Sales activity and prices will decline this year, as
many buyers hunker down and put off buying decisions during the economic
recession,” said Klump. “Housing market prospects will improve in 2010
in tandem with a rebound in economic growth.” (CREA 20/01/2009)
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