Bank of Canada Halves Overnight Money Target

March 3, 2009

Canadian monetary officials reduced their overnight money rate target by 50 basis points to 0.5%, hinted that more rate cuts are likely, and pre-announced that the semi-annual Monetary Policy Report, due April 23rd, will outline a framework for the possible use of credit and quantitative stimulus. Analysts had been divided over whether officials would ease by 25 or 50 basis points.

The statement released by the central bank today gave the following reasons to justify the further rate cut, which follows reductions of 150 basis points from December 2007 to April 2008 and then cuts of 50 bps last October 8, 25 bps on October 21, 75 bps on December 9th and 50 bps on January 20th.

  1. A slight downward revision in the projected path of core inflation.
  2. Another downward revision in expected Canadian growth.
  3. A larger excess in the first half of 2009 in aggregate supply over aggregate demand than had been imagined.
  4. The possibility that this so-called output gap may not begin to shrink until early 2010 because of potential delays in stabilizing global financial markets and larger-than-assumed negative confidence and wealth effects on aggregate demand.
  5. A still-deteriorating global economy.

Although officials anticipate a sharper recovery in Canada than many other industrialized economies, the statement promises not to tighten monetary policy until clear evidence of a reversal of the output gap emerges.  In the inflation forecasting model used by the central bank, excess supply is associated with falling inflation, and excess demand correlates with rising inflation.

The next Bank of Canada interest rate announcement is scheduled for April 21st.

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



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