Bank of Canada

March 2, 2009

The Bank of Canada will do no less than halve its overnight rate target to 0.5% at 14:00 GMT on Tuesday.  Economic trends justify a reduction of more than 50 basis points, but analysts expect officials to leave themselves a buffer before going all the way to zero rates.

Last month the central bank revised projected 2009 growth to minus 1.2%, a forecast that now appears far too optimistic.

  • Real GDP fell 3.4% saar last quarter, compared to the bank’s assumed drop of 2.8%.
  • Momentum in the quarter became more adverse with each ensuing month.  A 1.0% GDP drop in December got the first quarter of 2009 off on the wrong foot.  The index of leading economic indicators fell 6.2% at an annualized rate over the last five reported months.
  • In December, retail sales plunged 5.4%, twice as much as expected.  Their drop between September and December was 30.6% at an annualized rate.
  • Wholesale turnover dropped 3.4% in December, which was 70% sharper than anticipated. Such imploded 24.4% annualized between Sept and December.
  • Between November and December, exports tumbled 9.7%, and imports dropped 5.7%.  Canada’s current account recorded its first quarterly deficit since 2Q99 last October-December, and it amounted to 1.9% of GDP.
  • Housing starts are expected to decline more than 20% this year.
  • Inflation is now below target.  The latest 12-month changes are 1.2% for producer prices, minus 31.6% for raw material prices, 1.1% for consumer prices, and 1.9% for targeted core consumer prices.
  • Canadian equities are 10% lower than when policymakers met in January.  Ten-year Canadian bond yields have backed up 30 basis points to 3.00%.
  • The IVEY-PMI reading of 36.1 in January compares to quarterly averages of 43.8 in 4Q08 and 59.3 in 3Q08.  Sub-50 readings connote contraction.
  • Last but not least, jobs in Canada dropped at a monthly rate of 78K between October and January, a pace that in the larger U.S. labor market is akin to 618,000 per month. Canada’s unemployment rate increased a percentage point to 7.2% between October and January.

Since December 2007, the central bank has already reduced its target interest rate eight times.  The first four cuts between then and April 2008 totaled 150 basis points.  Like the Fed, Bank of Canada policymakers then made the mistake of putting easing on hold.  Another 200 basis points of reduction was administered in chunks of 50 bps last October 8, 25 bps on October 21st, 75 bps on December 9th, and 50 bps on January 20, 2009.  Governor Carney has promised a flexible Canadian monetary policy, suggesting that unconventional easing measures may be on their way.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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